STATE AID CONTROL IN THE FINANCIAL CRISIS

1. STATE AID CONTROL IN THE FINANCIAL CRISIS Humbert Drabbe

2. The financial crisis and the DG COMP’s response in 4 stages • Early days and the spill-overs of the sub-prime crisis: Rescue and Restructuring Guidelines • The fall of Lehman and the inter-bank markets: First Banking Communication • Drying up of credit for the real economy: Communication on Recapitalisation • Early 2009; Tackling core issues: Dealing with impaired assets and restructuring

3. A. Early days and the spill-overs of the sub-prime crisis • Problem: From the end of 2007, some banks with extreme business models are hit by the subprime crisis (WestLB, IKB, Northern Rock, Roskilde etc.) • COMP response: Standard approach based on R&R guidelines

4. B. The fall of Lehman and the inter-bank markets • Problem: After Lehman Brothers defaults, sudden drop in confidence restrains inter-bank lending and threatens to lead to a financial meltdown • EU response on the use of MS support: • Commission banking communication (13/10) • ECB recommendations on pricing of guarantees (20/10)

5. DG COMP’s response: The Banking Communication(13 Oct 2008) • Guidance as to the design of MS measures in order to prevent: • Distortions of competition between banks in different need • Negative spill-over effects on banks in other Member States • Subsidy races • Outright discrimination on grounds of nationality • General principles: • Legal basis Art. 87(3)b • Limited in time • Distinction fundamentally sound / distressed banks • Normal principles apply

6. More specific guidance: • Objective and non-discriminatory access • Temporal scope scheme • Aid limited to minimum / private contribution • Avoid undue distortions of competition (behavioural constraints) • Follow up by adjustment measures • Individual cases: restructuring / liquidation

7. DG COMP‘s response: The Recapitalisation Communication (5 Dec 2008) • Outlines a framework for national measures in order to maintain a level playing field • Derives from the main objective of recap measures: to ensure lending to the real economy • Differentiation in treatment of fundamentally sound and distressed banks in relation to price, safeguards, and the extent of future restructuring • Which banks are fundamentally sound? • Entry gate that MS will have to monitor ex ante when deciding about the eligibility • COMM will monitor ex post when reviewing the schemes on the basis of MS’s reports • Set of indicators and a role for national supervisory authorities: capital adequacy, size of recap, current CDS spreads, rating & its outlook

8. The RecapitalisationCommunication: Fundamentally Sound Banks • Remuneration to reflect: • Banks’ risk profile • Type of capital (subordination) • Exit incentives and safeguards against abuse • Risk-free rate benchmark • Entry price: • Euro-system methodology (20 Nov 2008) • Exit incentives: • Increasing remuneration, redemption clauses, link with dividends distribution • Safeguards: • Ban on aggressive commercial strategies, M&As by competitive tendering, use of capital for lending • Reporting & follow-up after 6 months: • Soundness of the banks, individual recaps conditions, use of capital for lending, path towards exit • Restructuring for distressed banks

9. Recapitalisation Communication: Banks not fundamentally sound • Higher risk – higher remuneration • Stricter safeguards (e.g. limitations on executive remuneration and bonus, maintenance of higher solvency ratio) • Follow-up: far-reaching restructuring (restructuring or liquidation plan to be assessed according to principles of the rescue and restructuring Guidelines)

10. D. Tackling core issues: Communication on Impaired assets • Problem: need to complement previous measures with a more structural action on impaired assets that prevent confidence and flow of credit to the real economy • Need for a consistent EU approach • Balancing immediate financial stability with return to normal market functioning • Cater for different situations across EU

11. Principles of designing asset relief measures under State aid rules (1) • Forms of relief measures: • asset purchase (“bad bank”), asset insurance, asset swap and hybrid solutions – free choice on the principle of equivalent treatment • Methodology: • Ex ante full transparency and disclosure prior to State intervention • Assets eligibility: • Flexibility as to the type of assets to cater for national specificities • Impaired at cut off date • Categorisation (asset baskets) • Assets valuation: • Independent third party’s certification & supervisory authorities’ validation • Bank’s viability review by supervisory authorities • Expert panel to assist the Commission • Aligning incentives to participate with public policy objectives • 6 months enrolment window when not mandatory

12. Principles of designing asset relief measures under State aid rules (2) • Asset management: • Prevent conflicts of interests (management & client separation) • Costs burden-sharing • Remuneration: • at least equivalent to the remuneration of State capital • Follow-up: • General principle of restructuring and return to viability

13. Summary: State aid for the financial sector – what has been done • 50 + decisions (→March 09) • 5 on-going second phase investigations • Several pending cases