Banking, burden-sharing and State aid - The Commission's Communication on aid to the banking sector is valid
With the current State aid issues regarding recapitalisation of banks in Italy and the on-going post-Financial crisis rescue of banks across the EU (including Ireland), it was timely that the Court of Justice (COJ) gave a preliminary ruling on 19 July 2016 following a reference from a Slovenian court which queried the compatibility of the 2013 Commission Banking Communication (Communication) with burden-sharing measures approved by the Commission under the State aid rules (Case C-526/14 - Judgment of the Court (Grand Chamber) of 19 July 2016 Tadej Kotnik and Others v Državni zbor Republike Slovenije).
In summary, the COJ found that the:
- Communication does not bind the Commission or Member States, and
- Commission did not misapply the State aid rules in light of the Communication guidelines;
- Communication and burden-sharing measures are compatible with the principle of legitimate expectations and the right to property; and
- Communication was compatible with Directives 2012/30 and 2001/24.
Essentially, when reviewing the compatibility of State aid measures with the internal market, the Commission can take the view that, as stated in the Communication, burden-sharing measures are essential in order that State aid in the banking sector is limited to the minimum necessary and that any distortions of competition in the internal market are limited.
In September 2013 (and following the 2007 global financial crisis), the Bank of Slovenia determined that five Slovenian banks were showing capital shortfalls which didn't have sufficient assets to satisfy their creditors and to cover the value of deposits. In December 2013 the Bank of Slovenia decided to recapitalise the banks and the Commission authorised the granting of State aid to the banks concerned after the aid had first been notified to the Commission by the Slovenian authorities. The measures at issue included writing off equity capital and subordinated debt. The Slovenian Court asked the COJ to give a preliminary ruling on the aspects of the Communication which provides guidelines on the criteria for the compatibility, with the EU internal market, of State aid granted to the financial sector in the financial crisis.
Are the Communication guidelines binding on the Commission?
No. The COJ found that Article 108(3) of the Treaty on the Functioning of the European Union (TFEU) gives the Commission discretion to assess the compatibility of aid with the internal market. The Commission cannot waive this discretion on the basis of the Communication. Though the Communication require adequate burden-sharing, an exception can be made where such a contribution might endanger financial stability, or lead to disproportionate results. Therefore the Communication is not binding, does not affect the Commission’s discretion and the Commission must still examine the specific exceptional circumstances relied on by a Member State in seeking to grant aid.
Compatibility of burden-sharing obligations with State aid rules
The Communication was adopted on the basis of a provision of the TFEU to the effect that the Commission may hold to be compatible with the internal market aid designed to remedy a serious disturbance in the economy of a Member State (i.e. under Article 108(3)(b) TFEU). The burden-sharing measures are designed to ensure that, before the grant of any State aid, the banks which show a capital shortfall take steps, with their investors, to reduce that shortfall, by raising equity capital and obtaining a contribution from subordinated creditors, as such measures are likely to limit the amount of the State aid granted. The COJ found that the Commission can refuse aid where it will not lead to conduct that is likely to achieve the applicable State aid objectives (i.e. remedy a serious disturbance in the economy of a Member State). On this basis, the COJ regarded that aid that improves the financial situation of the recipient, but is not necessary for achieving the relevant objective of Article 107(3) TFEU, is not compatible with the internal market. The COJ found that the objective was satisfied by the aid in question on the basis that the circumstances of the financial crisis justified the action taken. While the Communication requires aid to be limited to the minimum necessary, it does not encroach on State aid rules as it only establishes guidelines. On this basis, the Communication was not incompatible with the State aid provisions of the TFEU.
Principle of protection of legitimate expectations
The COJ found that the fact that, in the first phases of the financial crisis, subordinated creditors were not called upon to contribute to the rescue of credit institutions does not put the creditors in a position to rely on the principle of protection of legitimate expectations. This cannot be regarded as a precise, unconditional and consistent assurance capable of leading to a legitimate expectation on the part of the shareholders and the subordinated creditors that they would not be subject to burden-sharing measures in the future. As shareholders are liable for the debts of a bank up to the amount of its share capital, the fact that the Communication requires that, to overcome the capital shortfall of the bank, prior to the grant of State aid, those shareholders should contribute to the absorption of the losses suffered by that bank to the same extent as if there were no State aid, cannot be regarded as adversely affecting their right to property.
Principle of the right to property
As shareholders are liable for the debts of a bank up to the amount of its share capital, the fact that the Communication requires that, to overcome the capital shortfall of the bank, prior to the grant of State aid, those shareholders should contribute to the absorption of the losses suffered by that bank to the same extent as if there were no State aid, does not adversely affect their right to property (enshrined in Article 17(1) of the Charter)
The ECJ therefore held that the principle of protection of legitimate expectations and the right to property were compatible with the Communication.
Directives 2012/30 and 2001/24
The Banking Communication was also compatible with Directives 2012/30 and 2001/24.
The decision supports the Commission's emphasis on burden-sharing in the context of State aid for banks. Burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorization, by the Commission, of State aid to a bank with a shortfall is not contrary to EU law. The Communication sets out rules for when burden-sharing should be applied to shareholders and subordinated creditors, and when it should be avoided. Burden-sharing measures are designed to seek to prevent recourse to State aid as a tool to overcome the financial difficulties of a bank.