The concept

Burden sharing is a State-aid principle requiring that, before a bank receives public support, its existing capital providers first bear a share of the losses. It emerged from the European Commission's control of State aid to the financial sector during the crisis and was formalised in the 2013 Banking Communication, which made the write-down or conversion of shareholders and subordinated creditors a precondition for the Commission approving aid to a distressed bank. The aim is to limit the cost to taxpayers and reduce moral hazard by ensuring that those who invested in the bank's capital contribute before the State does.

Burden sharing under State-aid law is narrower than bail-in under the resolution framework. It reaches shareholders and holders of subordinated instruments, capital instruments and junior debt, but it does not, in its standard form, extend to senior creditors or depositors. Bail-in in resolution, by contrast, can reach a much wider range of eligible liabilities. The two regimes are related but distinct: burden sharing is a condition of granting aid, while bail-in is a resolution tool.

When it applies

Burden sharing is most relevant where a bank receives public support outside, or at the edge of, formal resolution. A precautionary recapitalisation, for example, is a form of extraordinary public support granted to a solvent bank that, under the resolution framework, must not be used to offset losses the bank has incurred or is likely to incur; where such support is given, State-aid rules and their burden-sharing conditions apply. Similarly, the government financial stabilisation tools, which allow public equity support or temporary public ownership in exceptional systemic circumstances, are subject to State-aid approval and its burden-sharing expectations.

Because it is grounded in State-aid control rather than the resolution directives, burden sharing is applied by the European Commission through its assessment of aid, drawing on the Banking Communication and related guidance rather than on a resolution article.

Burden sharing is set out in the European Commission's 2013 Banking Communication (Communication 2013/C 216/01), a State-aid instrument rather than resolution legislation. Within the resolution framework the related anchors are the BRRD, Article 32(4)(d), which frames extraordinary public financial support and precautionary recapitalisation, and Articles 56 to 58, which govern the government financial stabilisation tools and their conditions, including prior application of resolution tools. The write-down and conversion of capital instruments under Articles 59 to 62 gives statutory effect to loss absorption by capital holders.

Practical relevance for banks and investors

For banks, burden sharing means that access to public support is conditioned on imposing losses on capital instruments, so the composition of a bank's capital stack shapes how any support would be structured.

For investors, burden sharing is a reminder that subordinated instruments are exposed to loss not only in formal resolution but also as a precondition of State aid short of resolution. Holders of Additional Tier 1 and Tier 2 instruments in particular should treat write-down or conversion as a realistic outcome wherever a bank turns to public support, even when senior debt is left untouched.