The European Commission has published its communication on the restructuring of financial institutions that have received State aid during the financial crisis. The communication reflects the Commission’s tough approach on the extent of restructuring that is likely to be required of these institutions.

On 23 July, the European Commission published its long-awaited communication setting out its approach to the restructuring requirements for banks that have received State aid during the financial crisis.  

The publication follows a series of hard-hitting speeches by the Competition Commissioner, Neelie Kroes, on the need for significant restructuring to follow the assistance that was given to nearly 30 banks in 2008 and early 2009. Although the Communication notes ‘the need to modulate past practice in the light of the nature and global scale of the present financial crisis’, Commissioner Kroes’ public statements have indicated that the Commission is determined to minimise distortions of competition.  

The Commissioner’s public position  

The Commission’s initial reaction to the financial crisis was regarded by many as being helpfully flexible: it permitted rescue aid to be granted swiftly to a series of financial institutions facing serious difficulties. However, the Commission also indicated that the usual rigour of the State aid rules would be enforced nonetheless, albeit later in time – most notably, when the aided institutions would be required to undertake appropriate restructuring.  

This is reflected in the Commissioner’s latest public statements. In a speech to the British Bankers Association at the end of June, Commissioner Kroes made it clear that ‘restructuring must follow rescue aid’, stressing that banks that had not received aid ‘had a right to a level playing field’. She particularly noted the aid granted to the two major UK recipients, Lloyds Banking Group and Royal Bank of Scotland and stated that ‘the likelihood of significant divestments by RBS and Lloyds is strong’.  

Commissioner Kroes followed this up with a similar message to an Irish audience in mid-July, saying that: ‘the most problematic banks [will be] put to more farreaching restructuring requirements. The scrutiny and stress-testing of their business models together with the implementation of an adequate restructuring plan should ensure their return to long-term viability, while avoiding competitive distortions’.  

The communication on restructuring  

This message is reflected in the communication. The guidelines, which are in force until 31 December 2010, explain in particular how the Commission intends to use State aid rules to support financial stability, with a view to contributing to the return to viability of the European banking sector. The guidelines complement the Commission’s three previous communications on the design and implementation of State aid in favour of banks in the present crisis. Those communications established criteria to delineate the conditions under which banks are required to submit a restructuring plan. The new communication supplements the criteria by explaining how the Commission intends to assess the restructuring plans.

The Commission’s approach to assessing the restructuring plans is based on three fundamental principles:  

  • aided banks must be viable in the  long term without further State support;  
  • aided banks and their owners must carry their fair share of the restructuring costs; and  
  • measures must be taken to limit distortions of competition caused by the aid.  

Restoring long-term viability  

The Communication sets out stringent requirements for establishing the aided bank’s long-term viability. As recently stated by Commissioner Kroes: ‘aid is not a substitute for a sustainable business model’. This tough message is underlined by the requirement for restructuring plans to include a comparison with alternative options, including a break-up or absorption by another bank, to allow the Commission to assess whether more market-oriented, less costly or less distortive solutions are available. A plan which fails this test could be rejected.  

Importantly, the restructuring’s expected results need to be demonstrated under a base case scenario and under ‘stress’ scenarios. Stress testing is required to consider a range of scenarios, including a combination of stress events and a protracted global recession.  

Burden sharing  

The communication also reinforces previous statements that aided banks and their owners must bear an appropriate share of the consequences of past actions (not least to avoid moral hazard).  

With this in mind, the communication requires the bank and its capital holders to contribute to the costs of the restructuring as much as possible from their own resources, eg through asset sales, by absorbing losses with available capital and by paying adequate remuneration for State interventions.  

Consistent with this, the communication places limitations on aided banks’ ability to remunerate their capital owners in the form of dividends and payment of coupons on subordinated debt. Although ensuring appropriate capital returns may be necessary to ensure refinancing, the discretionary offsetting of losses (eg by releasing reserves or reducing equity) in order to pay dividends or coupons on subordinated debt is generally forbidden, since this runs the risk of allowing the aid to be used to reward the owners of the institution that has required aid.  

Limiting distortions of competition and ensuring a competitive sector  

The communication goes on to discuss the measures that should be put in place to limit the distortion of competition. The nature and form of such measures will depend on two criteria:  

  • the amount of aid and the conditions and circumstances under which it was granted; and  
  • the characteristics of the market or markets in which the beneficiary bank will operate.  

As to the first criterion, the communication makes clear that the amount of State aid will be assessed both in absolute terms and in relation to the bank’s riskweighted assets, taking into account the degree of burden sharing undertaken.  

As to the second criterion, the size and relative importance of the bank on its markets, once it is made viable, will be examined. If the restructured bank has limited remaining market presence, additional constraints in the form of divestments or behavioural commitments are less likely to be needed.  

That said, the communication makes clear that some banks will be required to divest subsidiaries, portfolios of customers or business units – including, if necessary, on the bank’s domestic retail market. A limit on the bank’s expansion in some business or geographic areas may also be required.  

If finding a buyer for subsidiaries or other activities or assets appears difficult, the Commission suggests that it may be prepared to extend the time period for the implementation of those measures, if a binding timetable for scaling down businesses is provided – up to a limit of five years.  

The communication also underlines the traditional principle that State aid must not be used for the acquisition of competing businesses. This condition should apply for a minimum of three years and may continue until the end of the restructuring period. However, in exceptional circumstances acquisitions may be authorised by the Commission if they are part of a necessary consolidation process restoring financial stability or ensuring effective competition – a sign of the Commission’s recognition of the need for cross-market solutions.  

Finally, the communication makes clear that aided banks will not be permitted to use State aid to offer terms (such as rates or collateral) that cannot be matched by competitors not in receipt of aid. For example, a bank may, in certain circumstances, be prohibited from proposing the highest interest rates offered on the market to retail depositors. The communication also prohibits banks from invoking State support as a competitive advantage when marketing their products. It is anticipated that such behavioural restrictions will remain in place for a period ranging between three years and the entire duration of the restructuring period.  

Timing of restructuring  

Although the communication still requires that the restructuring be completed ‘as soon as possible’, the Commission has indicated that it may allow some structural measures to be completed over a longer period than is usually the case, to avoid depressing markets through fire sales. The Communication gives a maximum of five years for banks to implement their plans – a significant increase on the two to three years traditionally allowed.  

Commerzbank – a recent example of this approach  

The Commission has also recently published the detailed restructuring terms it required of the German bank, Commerzbank. This is a good example of the tough standards being applied by the Commission to restructuring processes.  

In order to meet the Commission’s requirements on burden sharing and limiting distortions of competition, Commerzbank was required to make significant divestments – including its Eurohypo business – and to commit to reducing its branch network by over 20 per cent between 2010 and 2015.  

In addition to the structural commitments, Commerzbank was also required to agree to certain behavioural restrictions, notably an undertaking that it should not offer more favourable terms to customers than its three cheapest competitors in any area where it has more than a 5 per cent share of the market. Commerzbank also had to commit not to pay dividends or to use its reserves to make coupon payments for a certain time period.  

In short, it was required to put in place virtually the full suite of restructuring measures discussed in the communication, in one form or another.  


The Commission has made no secret of its intention to ensure that its traditionally tough approach to the restructuring of firms in difficulty should be applied to the banking sector as much as to any other sector. That is clearly borne out by the communication, the Commissioner’s rhetoric and emerging practice.  

Many restructuring plans are now going through the Commission’s processes, with the results expected to emerge over the next few months. As we approach the first anniversary of the major aid measures put in place, it is clear that significant restructuring of several major institutions is on the cards.