Today, the European Commissioner for Competition (Commissioner) briefed EU Economics and Finance Ministers on EU competition rules in order to prevent “national measures from making the crisis worse by exporting problems to other Member States.” Specifically, the Commissioner noted “the crisis has actually demonstrated that this risk is very tangible, with money flowing to banks benefiting from guarantees and leaving other banks in trouble.”

Recently the Commission for Competition has approved:

• Guarantee schemes (Denmark, Finland, Portugal, Ireland, Netherlands, Sweden, France, Italy); • Asset purchase schemes (Spain); • Holistic schemes with all of the above (Germany, United Kingdom, Greece); and • Individual cases such as individual cases of recapitalization (ING, Parex), guarantees (Fortis and Dexia) and one insurance firm recapitalization (Aegon).

The Commissioner was particularly critical of Member States that provide capital to “fundamentally sound banks” rather than rescuing banks that are on the verge of insolvency. The Commissioner cautions that schemes should be “properly designed to achieve the objective of lending to the rest of the economy and to avoid distortions of competition.”

The Commissioner also stated that the Commission is working to adopt more detailed guidance on how to address Member State recapitalizations under the EU’s State Aid rules. The guidance will be based on three broad principles:

  • First, the individual situation of each bank should be taken into account. The Commission must be provided a viability plan within six months, so that the bank’s business model can be reviewed and those that are in distress can engage in appropriate restructuring.
  • Second, the schemes must include incentives for the Member State’s capital to be redeemed once market conditions have returned to normal.
  • Third, “behavioral safeguards are needed to limit distortions of competition,” including “commitments to lend.”

"Let me stress that the Commission is trying to be pragmatic, to be proportionate and to offer Member States flexibility in the exact design of their schemes and in the combination of pricing and other safeguards to attain these objectives. But we also need to make sure that all the schemes broadly fit together and that their main effect will not be to advantage one national banking sector to the detriment of other Member States.”

The Commission expects to reach additional aid possibilities by year-end. The next meeting of Member States is scheduled for December 8, 2008.

In a separate announcement, the EU Council announced it has adopted a regulation raising the ceiling for assistance available under the EU support facility providing medium-term payment assistance for Member States in financial difficulty. The regulation increases the total amount of loans available to €25 billion from the current €12 billion. The EU Council justified the higher ceiling due to “the evolution of the international economic situation and by the large number of Member States currently outside the euro area.”