State aid control in the financial crisis
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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 stages

  • 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 stages

  • 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 stages(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: stages

  • 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 stages(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 Recapitalisation stagesCommunication: 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 sound

  • 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