STATE AID CONTROL IN THE FINANCIAL CRISIS

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STATE AID CONTROL IN THE FINANCIAL CRISIS

• Humbert Drabbe

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The financial crisis and the DG COMPs 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

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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 RR
  guidelines

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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)

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DG COMPs 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

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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

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DG COMPs 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 MSs reports
• Set of indicators and a role for national
  supervisory authorities capital adequacy, size
  of recap, current CDS spreads, rating its
  outlook

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The Recapitalisation Communication 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, MAs 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

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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)

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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

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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 partys certification
  supervisory authorities validation
• Banks 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

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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

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Summary State aid for the financial sector
what has been done

• 50 decisions (?March 09)
• 5 on-going second phase investigations
• Several pending cases