Commission Presents Guidelines On Restructuring Aid To Banks
In line with the European Council’s confirmation of its commitments regarding the restoration of confidence in and the proper functioning of the financial markets in the Union, the European Commission presented a Communication (“New Communication”)on its approach to assessing restructuring aid given to banks by member states.
The Commission has already adopted three successive communications(“Present Legislation”) on the design and implementation of state aid in favor of banks.The most important task of these communications is to ensure the full applicability and effectiveness of the following objectives:
• Financial stability and maintenance of credit flows in banks located in member states
• Competitiveness and efficiency of European banks in Community and international markets
The New Communicationoutlines how the Commission will use competition rules to support financial stability. The New Communication explains how the Commission will examine aid for the restructuring of banks in the present crisis, taking into account the need to modulate past practice in light of the nature and the global scale of the present financial crisis, the systemic role of the banking sector for the whole economy, and the possible systemic effects arising from the need for a number of banks to restructure within the same period.
General Approach of the New Communication
The general approach of the New Communication is based on three fundamental principles:
• Aided banks must be made viable in the long term without further state support,
• Aided banks and their owners must carry a fair burden of the restructuring costs and
• Measures must be taken to limit distortions of competition in the single market.
Restructuring Plan and Restoring Long-Term Viability
Present Legislation obliges member states to submit their restructuring plans to the Commission. The plans should be comprehensive, detailed, and coherent. They need to include a thorough diagnosis of the banks’ problems. The plans must outline how the proposed restructuring measures remedythe bank’s underlying problems.
In this context, the New Communication emphasizes that in order to devise strategies for a sustainable future, the banks will have to stress test their business. Such a test diagnoses the banks’ strong and weak points in order to identify the causes of the banks’ difficulties and weaknesses.
Limitation and Sharing of the Restructuring Costs by the Beneficiary Bank
The New Communication makes clear that aided banks must bear appropriate responsibility for their past behavior and contribute to the restructuring of the bank to the extent their own resources permit. This requires that the state aid to banks should be limited to the minimum necessary in order to limit distortions of competition. In other words, the restructuring aid should be limited to covering costs which are necessary to restore viability. This means that the bank should not be endowed with public resources which could be used to finance market-distorting activities not linked to the restructuring process.
The New Communication also emphasizes that banks must also contribute to restructuring costs by first using their own resources to finance the restructuring.
Limiting Distortions of Competition and Ensuring a Competitive Banking Sector
The New Communication analyzes the distortion of competition resulting from state aid to banks and presents measures to limit such distortion. In many cases, the large state support requires adjustments to competition such as structural measures (divestitures) or behavioral measures (constraints on aggressive pricing or other marketing strategies) or both. The Commission will pay attention to the possible risk that restructuring measures undermine the single market and will view positively measures that contribute to national markets’ remaining open and competitive.
Avoiding the Use of State Aid to Fund Anti-Competitive Behavior
The New Communication stresses that state aid must not be used to the detriment of competitors which do not enjoy similar public support. For example, banks should not use state aid to acquire competing businesses. However, the New Communication foresees that in exceptional circumstances and upon notification, such acquisitions may be authorized by the Commission where they are part of a consolidation process necessary to restore financial stability or to ensure effective competition.
Monitoring and Procedural Issues
According to the New Communication, the Commission will request detailed regular reports in order to monitor the proper implementation of the restructuring plan. The first report will have to be submitted to the Commission not later than six months after approval of the restructuring plan.
Temporary Scope of the Communication
The New Communication, justified by the current global financial sector crisis, will be applicable until 31 December 2010. However, it should be remembered that the Commission has power to review the content and the duration of the New Communication according to developing of market conditions.
Such confirmation was made at the Council’s meeting on 20 March 2009 and 18-19 June 2009.
Commission Communication, The Return to Viability and the Assessment of Restructuring Measures in the Financial Sector in the Current Crisis Under the State Aid Rules. Please note that the Commission agreed on the content of this Communication on 22 July 2009 which entered into force on 19.08.2009 upon its publication in the OJEU (OJ C 195, 19.08.2009).
As the Treaty is neutral to the ownership of property, state aid rules apply irrespective of a bank’s being under private or public ownership.
The application of state aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (OJ C 270, 25.10.2008, p. 8), the recapitalization of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (OJ C 10, 15.1.2009, p. 2), and the Communication from the Commission on the Treatment of Impaired assets in the Community Banking Sector (OJ C 72, 26.3.2009, p.1).
Please note that the state aid rules provide a tool to ensure the coherence of measures taken by those m states which have decided to act. However, the decision to use public funds remains with the member states.
The New Communication recalls the basic principles which apply to intervention by member states in the rescue and restructuring of banks in difficulty and does not alter but complements those criteria that have already been set up by previous legislation.
The sale of the bank to another financial institution may also be considered as restoring long-term viability in case the purchaser is viable and capable of absorbing the transfer of the ailing bank. A transparent, objective, unconditional and non-discriminatory competitive sale process should generally be ensured to offer equal opportunities to all potential bidders. The sale of a bank may also involve state aid to the buyer or to the sold activity or to both. If the sale is organized via an open and unconditional competitive tender and the assets go to the highest bidder, the sale price is considered to be the market price and aid to the buyer can be excluded.
According to paragraph 30 of the New Communication, the Commission takes as a starting point for its assessment of the need for such measures the size, scale, and scope of the activities that the bank in question would have upon implementation of a credible restructuring plan.