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Edited by François-Charles Laprévote, Joanna Gray and Francesco De Cecco
Carlos Botelho Moniz, Pedro de Gouveia e Melo and Luís do Nascimento Ferreira
This chapter addresses the EU State aid framework for the banking sector in three Southern European countries that were under a financial assistance programme: Cyprus, Portugal and Spain. It covers the main milestones in the strengthening, recapitalization and restructuring of the largest banks in those countries, and addresses the way in which bailout rules intertwine with EU State aid provisions. Contrary to what one might expect, funds channelled to the banking industry from the assistance programmes and close monitoring by the EU institutions and the IMF throughout the programmes, were not always sufficient to remedy the shortcomings surrounding the financial sector.
This chapter analyses the special nature of banks, and how the importance of the banking sector and its stability overlaps with the preservation of competitive banking markets. Banks have a unique standing in the economy, and are regarded as more vulnerable to instability than other firms as they provide liquidity and are involved in inter-bank lending markets and the payment system. Due to the systemic nature of banks, governments try to avert a crisis that can affect the whole banking sector by ensuring that banks which are ‘too big to fail’ remain sustainable. Such intervention has a distortive effect on competition, as it prevents ‘self-correction’ of the market. State aid measures that characterized the response of regulators in the recent financial crisis were based on the premise of the special nature of the banking sector and its importance to the economy. In addressing the special nature of banks the chapter looks into the approach adopted towards banks under State aid control, tackling issues such as ‘too-big-to-fail’ and the BRRD and SRM.
Since the beginning of the financial crisis, the European Commission has acted quickly by flexibly adapting the application of State aid control to the special crisis context. Between 2008 and 2013, the Commission adopted seven communications that provide a comprehensive framework for common conditions at EU level for access to public support and the requirements for such aid to be compatible with the internal market in light of State aid principles. This chapter presents the evolution of the legal framework of State aid law and the developments introduced by the seven communications. It also presents the interaction between the State aid rules and the new resolution framework (Bank Resolution and Recovery Directive and Single Resolution Mechanism).
While most of the public support of financial institutions granted during the crisis period was deemed State aid, there were still a few instances in which public support escaped this qualification. This chapter examines the conditions under which public funding of banks does not constitute State aid, with particular emphasis on the application of the market economy investor principle (MEIP) to banking. It describes the main aspects of the MEIP, refers to the role of the European Central Bank in defining the rates of remuneration that would be acceptable to a private investor, and reviews the main contentious issues arising from application of the MEIP. It also refers to other public measures which do not constitute State aid other than by conforming with the behaviour of a hypothetical private investor.
The financial crisis hit the Belgian banking sector hard and early. The Belgian State had to bail out the three banking pillars of Belgium, namely Fortis, KBC and Dexia. From recapitalisations to guarantees and impaired asset relief measures, Belgium made use of the whole panoply of State aid measures available to restore confidence in the banking sector, under the benevolent and yet firm control of the European Commission. Belgium also introduced a guarantee scheme for shareholders of financial cooperatives, which the European Commission found incompatible with the internal market. Overall, while the European Commission did not burn bridges, it made sure that State aid granted by Belgium did not go one bridge too far.
French banks proved relatively resilient to the crisis. Their diversified model made their losses generally manageable, with the exceptions of Dexia and Crédit Immobilier de France, which ultimately had to be placed in resolution. However, the crisis revealed some of their weaknesses and led to targeted intervention by the State, including financial support schemes – through the creation of the Société de Financement de l’Économie Française and the Société de prise de participation de l’Etat – and individual measures. France also strengthened its oversight framework with the creation of the Autorité de Contrôle prudentiel and of the Conseil de Régulation Financière du Risque Systémique. This set of measures contributed to avoiding any major bankruptcy and maintaining funding to the real economy.
Bart P.M. Joosen
This chapter discusses State aid to the Dutch financial sector, highlighting the most significant case of 2008. The banking consortium bidding to acquire ABN AMRO was subject to material constraints caused by the financial crisis. When one of the consortium members, the Belgian-Dutch conglomerate Fortis, was unable to complete the transaction due to a shortage of financing, this caused an immediate and severe crisis within ABN AMRO. Given the potentially severe consequences of that bank’s collapse on the Dutch economy, the government provided emergency liquidity assistance, nationalizing parts of the bank and becoming the new shareholder. The European Commission assessed compliance of that assistance with the prevailing State aid rules. The discussion of the ABN AMRO case demonstrates that State aid is permitted in exceptional circumstances, to remedy a serious disturbance in the economy of a Member State, albeit with limitations and strict conditions.
François-Charles Laprévote and Florine Coupé
In the early days of the financial crisis, the Commission’s review of State aid granted to banks in order to remedy serious threats to a national economy was still in its infancy. However, the length and intensity of the crisis resulted in a tailored-made and detailed ‘Crisis Framework’. This chapter outlines the various measures used by Member States to support their banks facing financial difficulties, e.g., recapitalization, impaired assets measures, guarantees, and liquidity measures. This chapter also describes the applicable texts, the emblematic cases, and the Commission’s assessment of the main legal issues for each type of measure.