The newly effective Bank Recovery and Resolution Directive shields taxpayers from paying to rescue a failing bank until the bank’s shareholders and creditors have done their part.

The European resolution framework for banks, which took full effect on January 1, 2016, aims to shift the burden of rescuing failed banks from taxpayers to shareholders and creditors.

The cornerstone of the legislation is the Bank Recovery and Resolution Directive (BRRD), which requires shareholders and creditors to pay for—or "bail-in"—eight percent of a failed bank’s liabilities before taxpayer support can be provided.

The BRRD does include a "precautionary recapitalization" exception that permits capital injections from state funds without triggering the bail-in rule, but the exception is permitted only when the injection is deemed precautionary, follows a stress test and specifically addresses capital shortfalls implied by an "adverse scenario."

In such cases, banks still must comply with the EU state aid rules. The relevant 2013 Banking Communication of the European Commission also requires the bail-in of shareholders and subordinated creditors, but not of senior debt, before any state aid can be granted. The 2013 Communication provides exceptions only when burden-sharing is deemed not proportionate or counterproductive to the preservation of financial stability.

These exceptions may open a path to avoid the resolution of the bank even when state aid is provided, as some recent cases have shown. But both the European Commission and the Single Resolution Board have made it clear that they interpret these exceptions narrowly.