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STATE AID CONTROL IN THE FINANCIAL CRISIS. Humbert Drabbe. 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

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the financial crisis and the dg comp s response in 4 stages
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

a early days and the spill overs of the sub prime crisis
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
b the fall of lehman and the inter bank markets
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)
dg comp s response the banking communication 13 oct 2008
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
more specific guidance
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
dg comp s response the recapitalisation communication 5 dec 2008
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
the recapitalisation communication fundamentally sound banks
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
recapitalisation communication banks not fundamentally sound
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)

d tackling core issues communication on impaired assets
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
principles of designing asset relief measures under state aid rules 1
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
principles of designing asset relief measures under state aid rules 2
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
summary state aid for the financial sector what has been done
Summary: State aid for the financial sector – what has been done
  • 50 + decisions (→March 09)
  • 5 on-going second phase investigations
  • Several pending cases
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