The EC's rules on "State aid" have been put to the test in the last six months, with EU governments adopting a raft of measures to support banks and other businesses in the context of the global financial crisis. Normally under EC law, the Commission must be notified of State aid in advance, and will only give its approval if the aid is deemed to be "compatible with the Common Market." The Commission may also make its approval conditional on certain conditions being met.
It may appear that the Commission has relaxed its application of State aid rules in the context of the current financial and economic crisis. In the last six months it has waved through forty five national measures in favour of the financial sector and issued four new Communications softening EC State aid rules in light of the current economic downturn. However, it now seems that the Commission is planning to tighten the screws on national measures to support banks as it oversees the necessary restructuring of the rescued banks. "Rescued" banks are going to be required to provide the Commission with detailed restructuring plans and the Commission claims it will be taking a tough line, demanding total transparency and severe compensatory measures.
In a recent speech at Deutsche Bank in Frankfurt, Germany, Competition Commissioner Neelie Kroes stated that "the high levels of transparency we are demanding are essential for determining the full scope of our collective problems and rebuilding trust." She continued "only by fully identifying and correctly valuing the impaired assets can we approve an effective restructure and start again. To protect taxpayers and maintain the level playing field, the public purse will simply not be open to banks who do not want to open their books in return." She concluded, "It's going to be messy and it's going to be hard but we are determined to avoid the mistakes of the 1930s."
It seems that this applies not only to asset relief programs under the Commission's new Communication on the Treatment of Impaired Assets where full disclosure is already mandatory, but also to other restructurings being carried out under the Commission's supervision. The suggestion is that banks which have already received "rescue aid" may have to disclose their toxic assets as a condition to obtaining approval from the Commission for the longer-term restructuring plans.
Severe Compensatory Measures: Cutting Banks in Half
Alongside full disclosure of toxic assets, the Commission is expected to take a tough approach concerning the measures necessary to compensate for any distortion of competition. In the Deutsche Bank speech, Commissioner Kroes said that "half-solutions won't help. We are aiming to clear balance sheets, either through restructuring or winding down of banks, so that the survivors have the best chance of a healthy future."
And it seems that this speech was not an idle threat. It has recently been revealed that the Commission is requesting German Landesbank BayernLB to decrease its balance sheet by a drastic 50 percent, essentially requiring that the bank be cut in half.
While this case is likely to become the benchmark, the compensatory measures that will be required of other banks will be determined by their particular situation. The Commission will assess distortions of competition resulting from the aid granted, taking account of the following factors:
- Total amount of the aid, including from asset relief, guarantee and recapitalisation measures;
- General soundness of the beneficiary bank;
- Quality of risk management of the bank;
- Level of solvency ratios in the absence of aid;
- Market position of the bank;
- Distortions of competition from the bank's continued market activities; and
- Impact of the aid on the structure of the banking sector.
What Does This Mean in Practice?
Banks which have already received rescue aid will need a very good grasp of EC State aid rules and politics in order to navigate the negotiations with the Commission, and with their national authorities, in the months to come. Banks which have not received any State support will be anxious to ensure that any aid granted to their competitors does not represent an undue distortion of competition contrary to EC State aid rules. They will want to consider their options of challenging any grants of aid which does not seem to meet the criteria