Never before has the role of the State in securing, stimulating or even saving the economy been put in such sharp focus. Late last year when the tremors began we saw the rescue of Northern Rock in the UK. This was a big deal at the time but has been dwarfed since. Other European rescue plans for banks began to emerge and since early September the banking sector is universally acknowledged to be in crisis. Inter bank lending has dried up due to the erosion of confidence, with the result that liquidity is frozen and even fundamentally businesses everywhere are faced with potential cashflow difficulties that are capable of leading to insolvencies that would not happen were normal credit flows in operation.

No time to lose!

Obviously the various governments of the EU are determined to do whatever is necessary to prevent a meltdown. First the Irish government decided to guarantee deposits and debt instruments in certain banks, and now several Member States (including the UK) have followed with various measures, to such extent that the European Commission has compiled a rolling table of different measures across the EU. What has differentiated these steps from ordinary aid plans has been the urgency required. Where even 24 hours of delay can make the difference between a run on a bank or comparative safety, governments have had to work 24 hour days to come up with plans they believe will work. Balancing this with the pan-European State aid discipline designed to maintain competition across the EU is very difficult.

The Commission notes that the treatment of illiquid but otherwise fundamentally sound financial institutions should be distinguished from the treatment of financial institutions that are in difficulties through poor asset liability management or risk strategies. The traditional rules for State intervention to support failing firms (i.e. the latter scenario) are contained in the Commission’s 2004 Guidelines on aid for rescuing and restructuring firms in difficulty (“the R&R Guidelines”). These guidelines have been used for some notable rescue plans over the years to the likes of Alstom, British Energy and latterly Northern Rock. However, the Commission has realised that the sudden need to help fundamentally sound institutions that are suffering through the general situation does not necessarily sit well with the R&R Guidelines, and marks uncharted waters in State aid terms. Thus the Commission has moved very quickly to publish on 13 October 2008 a new emergency “Communication on the application of the State aid rules to measures taken in relation to financial institutions in the context of the current financial crisis” (“the Communication”), which broadly sets out new parameters for State intervention during the current crisis.

Commission invokes special discretion

Competition Commissioner Neelie Kroes has adamantly said that Competition policy, in which State aid is a fundamental pillar alongside the control of mergers and restrictive practices, will not be side-stepped for political expediency in light of the current crisis.

The Commission acknowledges that these are unprecedented times and has therefore played what might be described as its “joker” card in order to change the rules a little. In this case it is the little known and almost never used provision in Article 87(3)(b) of the EC Treaty in which it is stated that “aid to … remedy a serious disturbance in the economy of a Member State …. may be declared compatible with the Common Market”.

Broadly, the Commission has invoked this provision to afford itself discretion to allow measures that otherwise would surely not have been accepted. The Commission has always been extremely reluctant to invoke this provision for fear of creating dangerous precedent. The Commission denied its application in the Northern Rock case in the last year but also in such situations as the recovery of Eastern Germany following unification on the grounds that for this provision the “whole economy” of a Member State must be under threat and not just a portion of it. The last time the provision was used was in 1991 regarding a Greek privatisation plan that was considered crucial to the recovery of the entire economy.

Interestingly, the UK government has found itself similarly inclined to invoke exceptions, changing national merger control provisions to introduce a new public interest ground for approving the anticipated merger of Lloyds/TSB and HBOS. What is very different about that, however, is that it was a matter of national law only, by virtue of the European merger control “two thirds” rule, whereby when both merging parties have more than two thirds of their turnover within one and the same Member State (as here) control reverts to the Member State.

Nevertheless, State aid is the one area in which the European Commission enjoys the monopoly of enforcement power, so the Commission is responsible for ensuring that Member State discipline is maintained. That said, one can imagine the pressure the Commission will have been under in recent days.

New parameters for emergency assistance to financial institutions

The Communication sets out a series of guidelines to help Member States understand where the new State aid boundaries might be for emergency assistance to financial institutions. The Commission is by no means relinquishing control but it is saying that a special understanding must be given in light of current circumstances, and here are the broad limits within which it will consider Member States’ proposals, and work with them to arrive at solutions that are workable but which will cause the minimum distortion of competition.

The Communication addresses in turn the different types of measures anticipated including guarantees, recapitalisations, controlled liquidations and other liquidity assistance measures. The Commission has simultaneously employed these new principles to approve the Irish, UK and other packages at the same time. The Communication is in no way as specific as a Block Exemption Regulation in telling Member States exactly what will or will not be approved in any given situation. The message from this would seem to be that these are the broad parameters and the detail is a matter of negotiation.


The Communication gives guidance as what sort of instruments will be acceptable and under what conditions, and draws several sub-headings for consideration in each case: 

  • Eligibility – guarantee schemes put in place must be objective and non-discriminatory. An initial objection against the Irish measures was that they were thought to cover certain indigenous banks only rather than all banks incorporated in the State regardless of their seat of business; 
  • Material scope – retail deposits and debt held by retail clients are acknowledged to be the most important point of security for overall consumer protection and confidence in order to protect against bank runs and negative spill over effects, so guarantees against these will be accepted. The Commission acknowledges that certain types of wholesale deposits and other debt instruments may also be considered, but as a matter of principle subordinated debt and indiscriminate coverage of all liabilities should be avoided as they will tend to protect shareholders and risk capital investors only; 
  • Temporal scope – duration must be as limited as possible. Measures must be subject to review every six months at a minimum and limited to two years in principle; 
  • Minimum aid and private sector contribution – guarantees must not be free of charge and must be paid for by the beneficiaries at levels as close as possible to market rates. It is acknowledged that institutions’ ability to pay is compromised at present but this should not mean that guarantee schemes are at no cost, and that there should be clawbacks at later stages and “better fortunes” repayment mechanisms. If guarantees are ever collected against it should be clear that the beneficiaries will cover everything they can themselves with the State only being left with possible shortfalls; 
  • Avoid undue distortions of competition – schemes should include measures to ensure that the benefit of guarantees is not abused to enable beneficiaries to distort competition, for example by aggressive expansion techniques. Ways of securing this will include behavioural restraints linked to the guarantees such as pricing and market share caps; 
  • Follow up by adjustment measures – to ensure that guarantee packages are genuine emergency measures they should be accompanied by longer term restructuring plans for the sector or by liquidation of individual beneficiaries, particularly in cases where guarantees are called upon; and
  • Restructuring plans for individual cases if guarantees called upon – if guarantees are called then the relevant beneficiaries should be considered as in difficulty, triggering the requirement for delivery up to the Commission of a viable restructuring plan as per the Rescue and Restructuring Guidelines 

Recapitalisation, controlled liquidation and other forms of liquidity assistance

The Communication continues to describe the above alternative mechanisms, but stating that each should be subject to the same considerations as the bullet points above (e.g. objective criteria for eligibility, limits of duration etc.) as for guarantees.

  • Recapitalisations - this may be a legitimate means of backing a fundamentally sound financial institution. Terms should minimise the level of any aid and grant rights that are proportionate to investments. Instruments such as preferred shares with adequate remuneration will be viewed positively, or else clawbacks and better fortunes clauses as described above will need to be considered. Capital injections should be limited to the amounts strictly necessary and not abused to allow aggressive commercial strategies. 
  • Controlled liquidations - this must be done carefully to avoid preferential protection of shareholders for example and if benefiting some creditors then regard should be had to the parallel prioritisation of scope with guarantees (e.g. retail clients). Banking licences should be rescinded as quickly as possible and sales resulting from the liquidation should be managed on an open and transparent basis with a view to securing maximum value. 
  • Liquidity assistance - general measures open to all market players (e.g. lending to the whole market on equal terms) may not be aid at all, in the same vein as a general cut in income tax for all would not be a State aid due to non-selectivity. Dedicated support may also not be aid in individual circumstances provided it is supplied for market remuneration to institutions that are sound at the time of the investment (e.g. the Bank of England’s initial investment in Northern Rock). All other liquidity schemes should be considered under the R&R Guidelines, however.

Wider impact for regional and local authorities?

So what will all this mean for regional and local authorities trying to do their best to prop up their constituencies and maintain growth, stability and jobs?

Firstly, it is not expected that regional or local authorities are likely to be backing up international banks.

Secondly, it is highly unlikely that the benefit of Article 87 (3)(b) will be available to any measure for which the effects are regional and not national in nature. However, the mere existence of the Communication and the recognition that these are unprecedented times may offer some hope that a slightly more generous and tolerant view may prevail than would otherwise be the case.

Public authorities will always be under pressure in these situations to adopt measures which are transparent and non-discriminatory. This is not always mandated by the State aid rules but is usually positive anyway.

If rescuing firms in difficulty is the objective, then the R&R Guidelines offer scope for creation of schemes for the rescue and restructuring of SMEs at least, for which one might reasonably expect a rapid Commission reaction and approval if the circumstances were right non-discriminatory. This is not always mandated by the State aid rules but is usually positive anyway. Another point of note is that the De Minimis and General Block Exemption Regulations (permitting aid without prior notification to the Commission) are not available for firms in difficulty as defined in the R&R Guidelines. Authorities must be careful that they do not wrongly rely on a block exemption towards failing firms.

Some possibilities to explore?

In any event, whether on the basis of transparent scheme or ad hoc decision, some possibilities which may be explored include: 

  • Market economy investments by loan funds – for example the establishment of a fund to provide loans at market rates to viable businesses to help short term liquidity. The intention behind the main banking packages is to restore liquidity but one might reasonably assume this will not happen overnight, hence the possible desirability for setting up such funds. In principle a loan to a viable business at the Commission’s published reference rates of interest should never be held to constitute aid. Other forms of market economy investment measure should similarly hold up as not aid. One might question what is a market economy investment decision when ordinary banks may not be investing, but there is sure to be some room for manoeuvre there at least. 
  • De minimis schemes – the de minimis block exemption of EUR 200,000 to single undertakings over any three year period may also prove helpful, possibly in terms of a scheme. Aid of this sort of level may be enough to help smaller businesses in particular survive a temporary liquidity crisis. A scheme of this nature would probably require some objective eligibility criteria at least to determine solvency prior to support being issued. 
  • Public infrastructure investment - Gordon Brown has spoken of investing in public projects to kick-start the economy. Building infrastructure of benefit to the general public lacks the selectivity to qualify as State aid so may be carried out on a large scale if the funds are available.
  • Direct development - there is precedent for finding no aid through the State merely using own funds to develop own land and properties. Assuming the authorities do not subsequently sell or lease to private parties at less than open market value (OMV – achieved by open tender or expert testimony), no aid is involved. For example, in order to kick-start activity the State may remediate its own polluted site then sell at OMV, even if costs are not fully recovered. No one is disadvantaged because absent the State intervention the site would have remained derelict due to the imbalance of development costs to value, and the ultimate user pays OMV anyway. 
  • Services of general economic interest - the State may fund and entrust companies with the provision of a clearly defined service to the public without granting aid, provided there is a clearly defined need to fulfil, the parameters of compensation are defined in advance, and the price paid is no more than market value (established by competitive tender or prior study of the costs a well-run undertaking would incur plus reasonable profit). As with direct development this enables authorities to make things happen and put money in circulation while also getting things done in their locality of benefit to the local population generally. 
  • Rescue and Restructuring schemes – the R&R Guidelines allow for rescue and restructuring schemes to be developed for the benefit of SMEs only, which can be notified to the Commission and approved as framework schemes. One might expect a rapid Commission reaction in the current climate. Such schemes should state maximum amounts of rescue aid per undertaking which should not in any event exceed EUR 10m. However, once approved in principle by the Commission as a scheme the individual restructuring plans that would normally need to be notified to the Commission within six months need not be so notified, with only annual reports needed by the Commission on the overall workings of the scheme generally. 
  • Ad hoc R&R decisions – notwithstanding issues of transparency and non-discrimination, some regional or local authorities may consider it appropriate to offer R&R packages to significant employers within their localities assuming all the relevant conditions in the R&R guidelines are met. This of course requires individual notification to the Commission, but in the current crisis in particular this can be expected to be quick and efficient. Using the R&R Guidelines is seldom seen as ideal but may be a vital last resort. 
  • General Block Exemption Regulation (GBER) – this recent instrument is not designed to help crisis situations but rather to permit investment and other aid for chosen purposes. However, schemes designed within GBER limitations for investment in SMEs, for example, or for investment in areas eligible for regional aid, may serve a similar purpose (albeit that in the majority of cases the permitted aid would require match investment at different levels from the beneficiaries, which may be difficult in such times) Similarly, GBER schemes involving risk capital funds may be difficult at present given the need for 50% match funding from the private sector or 30% in the case of funds to support SMEs.


The Communication and the invoking of Article 87(3)(b) to remedy serious disturbances in the economy are highly significant steps in State aid law and practice. However, the Commission has also been careful to emphasise the exceptional situation, limit the application of the Communication to financial institutions, and to hold back any suggestion that the usual State aid discipline that has been built up over decades has been compromised at all. Clearly the standard rules are still the benchmark for every idea for State intervention and they still offer plenty to work with, thus enabling regional and local authorities to intervene at least to some degree should they see fit.