The European Commission has approved in accordance with EC State aid rules an extension of the UK’s credit guarantee and recapitalisation schemes, which form part of the UK's package of support measures for financial institutions during the current financial crisis.
State aid and the financial crisis
One of the main challenges faced by Member States in the current financial crisis has been to support financial institutions in difficulty and restore confidence in financial markets, whilst at the same time respecting EC State aid rules, which prohibit unauthorised State aid on the basis that it distorts competition in the Single Market.
Member States have been able to achieve this by relying on an exception offered by Article 87(3)(b) EC Treaty, which allows Member States to grant aid for the purpose of remedying ‘a serious disturbance in the Member State’s economy’. Given its global impact, the current financial crisis has unsurprisingly been recognised by the Commission as constituting a valid purpose within the meaning of this definition. However, the conditions under which such aid may be granted are strictly controlled.
Commission Guidance on measures for banks in crisis
On 13 October 2008, the Commission adopted a Communication on “The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis” (“the Communication”). The Communication makes very clear the strict parameters within which aid may be granted by Member States in this context and has enabled Member States to obtain approval for emergency rescue measures that are compliant with the guidance (i.e. that contain the relevant safeguards against distortions of competition in the Single Market, summarised below) much more quickly than would ordinarily be the case, and in some cases within 24 hours.
In essence the Commission guidance stipulates that any measures taken by Member States must not give rise to excessive distortions of competition, for example by discriminating against financial institutions based in other Member States and/or allowing beneficiary banks to unfairly attract new additional business solely as a result of the government support. As further safeguards, the guidance also stipulates that measures must be limited in time and foresee adequate contributions from the private sector by way of remuneration for the introduction of support schemes, for example through fees payable for guarantees.
The objective of the UK package
The UK’s package of support measures for the banking industry, which has similarities with national rescue plans initiated by other EU countries, such as France and Germany, at around the same time, was originally approved by the European Commission on 13 October 2008. Its objective: to restore confidence in the creditworthiness of UK financial institutions; to ensure the stability of the UK financial system; to protect ordinary savers, depositors, businesses and borrowers; and to stimulate inter-bank lending.
What does the UK package include?
The UK package is essentially made up of three measures. First, a recapitalisation scheme, under which the UK government provides fresh capital to banks and building societies in exchange for preference or ordinary shares, the aim being to enable banks to strengthen their balance sheets against possible losses. Secondly, a credit guarantee scheme, under which the UK government guarantees the new issuance of short and medium term debt by eligible institutions (currently over 35 UK banks and building societies), in return for marketorientated remuneration, the objective being to support fundamentally sound banks unable to access funding due to the current crisis. And lastly, an extension of the short-term liquidity measures provided by the Bank of England.
The UK recapitalisation and credit guarantee schemes were slightly modified in December 2008. Essentially, the changes related to fees payable on guaranteed liabilities and the widening of the range of currencies in which guaranteed instruments could be issued. The modifications brought the UK measures into line with the Communication, issued on the 13 October 2008, simultaneous with the Commission’s original approval of the UK schemes.
Re-evaluation of the schemes
As part of the original package approved by the Commission on 13 October 2008, the UK had committed to report to the Commission every six months on the execution of the credit guarantee and recapitalisation schemes. In line with this, on 27 March 2009, the UK notified the Commission that it intended to prolong its support measures to the banking industry due to the continuing severe stress in the global and UK financial markets. On 15 April 2009, the Commission gave the green light to the UK to extend the availability of the measures for a further 6 months until 31 October 2009.
Why did the Commission approve the prolongation of the schemes?
As part of the notification, the UK provided the Commission inter alia with a report on the operation of the credit guarantee scheme, which is administered by the UK Debt Management Office, demonstrating the success of the scheme in its early stages and the need to extend the window for issuing new debt under UK Government guarantee until 13 October 2009.
As regards the recapitalisation scheme, the eligible beneficiaries remain basically sound banks, with eligible liabilities of above £500 million. A capital injection into a bank that has already accessed the recapitalisation scheme, however, will be subject to individual notification and approval.
The Commission's investigation found that the circumstances on financial markets justify the extension of both the recapitalisation and credit guarantee schemes, on the basis that the schemes are designed to underpin lending to the UK real economy. The schemes will therefore continue to subsist until 31 October 2009, after which time they may face the Commission’s scrutiny yet again if the UK’s financial markets have not significantly improved.