In response to the financial and economic crisis, the European banking system received a significant amount of State funds, and allowed a wide range of rescue and restructuring measures to ensure financial stability. As State aid rules in the banking sector evolved to reflect the nature of the crisis, the policy towards compensatory measures, which are designed to limit any distortions to competition created as a result of the aid, has changed over time. This chapter considers the wide range of compensatory measures that have been introduced, how the approach to compensatory measures has changed over time and whether the measures have met their stated intentions.
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Joanna Gray and Francesco de Cecco
This chapter explores the challenges presented by the interplay between State aid control and financial regulation. While, during the financial crisis, State aid law and policy demonstrated remarkable openness towards the conceptual toolkit of financial regulation, the uncertain contours of concepts such as systemic risk and moral hazard affected the degree of congruence between theory, policy and practice. What is more, the presence of multiple regulatory objectives tended to present the European Commission with some difficult trade-offs in attempting to pursue stability, the prevention of moral hazard and the preservation of lending to the real economy simultaneously, while attempting to minimize distortions of competition.
The financial crisis hit Germany’s banking industry early and severely. But closer analysis reveals that Germany’s banking crisis was peculiarly asymmetric due to the country’s highly segregated three-pillar banking model, and to the differentiated business models, degrees of exposure to international financial markets, and reliance on interbank borrowing, that it entailed. These idiosyncrasies played a major role in shaping the three phases of Germany’s response to that crisis, from the early ad hoc aid measures designed to rescue the banks most heavily exposed to the subprime crisis, through the implementation of a comprehensive scheme to stabilise banks faced with liquidity issues, to the creation of a bad bank to tackle the most severely and persistently affected banks.
François-Charles Laprévote and Amélie Champsaur
This chapter looks at the relationship between the application of State aid rules under the new 2013 Commission Banking Communication and the resolution framework laid out under the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation. The parallel existence and implementation of these two legal frameworks (which often refer to each other) raises the issue of possible conflicts or inconsistencies, in particular with respect to preventative measures, burden-sharing or bail-in measures, and experts assessments of a bank’s viability or valuation. The chapter suggests a number of policy measures to ensure consistency in the implementation of the two legal frameworks.
Dora Sif Tynes
Iceland was hit particularly hard by the global financial crisis in 2008. As a result, the Icelandic authorities enacted a series of measures to combat the effects of the crisis related to the rescue and restructuring of the banking system, resolution and insolvency regimes and fiscal policy. This entailed an unprecedented allocation of State aid, mainly in the banking sector. This chapter provides an overview of the State aid measures in question, as well as the different regulatory measures enacted by the Icelandic authorities.
Vincent J.G. Power
This chapter considers the application of the EU Banking State Aid rules to Ireland during the Banking Crisis. It examines the Irish guarantee and asset management agency as well as the specific aid decisions for each of the Irish banks and building societies. Ireland is a fascinating case study because of the magnitude of the crisis in Ireland and the level of aid provided but also the intervention of the Troika and the recovery of the Irish economy.
Ginevra Bruzzone, Miriam Cassella and Stefano Micossi
This chapter illustrates the reasons which led to the adoption of a regulatory framework for bank resolution in the EU and describes the main features of the BRRD and the SRM. On the whole, the system is well designed. However, some of its features deserve continuing consideration and review. The decision-making procedure for placing a bank under resolution is overly complex. A proper interpretation of the BRRD rules requiring the bail-in of private capital for any measure of support of banks is crucial for the sake of financial stability. The complementary role of State aid control has still to be fine-tuned. A further critical area is the adequacy of the Single Resolution Fund in providing a credible backstop to the SRM.
François-Charles Laprévote and Sven Frisch
When the financial crisis struck, the European Union lacked a comprehensive supranational regulatory and bank resolution framework. While EU-based banks operated on a cross-border basis, crisis management and resolution tools remained national in scope. Using the concept of the ‘financial trilemma’, we argue that the Commission’s crisis-time State aid policy sought to fill this void by both leaving Member States enough leeway to restore financial stability and coordinating their interventions to preserve cross-border banking, in line with constitutional market integration objectives. But the limits of State aid law and an often reactive approach to national interventions meant that the scope, overall coherence, and effective contribution of the Commission’s State aid decisions to market integration objectives varied from case to case.
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.