Over the past few days, the European Commission has approved a number of general bank rescue programs developed by Member States under the EU state aid rules. So far, the Commission has approved programs proposed by the United Kingdom, Denmark, France, Germany, Ireland, the Netherlands, Portugal, and Sweden. For all firms with activities in financial markets in Europe, it is important to ensure that transactions with, or in respect to, beneficiaries of state aid comply with the EU state aid rules. Individual measures that run afoul of these rules will be invalid, which can lead to the collapse of an entire financial transaction.

After the failure of Lehman Brothers, a parade of European banks faced the risk of insolvency, which made urgent state intervention necessary. Due to the large number of cases and the introduction of several general schemes by Member States (mostly modeled on the UK rescue package), on October 13 the Commission released a communication that explains the rules that the Commission will apply to rescue packages (the "Commission Communication").

The EU state aid rules are designed to secure a level playing field for all companies operating in the EU. Under the rules, EU Member States are under an obligation to notify any plan to grant aid to the European Commission. The Commission has discretion to approve the aid, provided it does not unduly distort competition and is the minimum required to address a particular market failure.

The Commission Communication is based on EC Treaty rules: Article 87(3)(b) allows aid that remedies a "serious disturbance in the economy of a Member State." The Communication states that the Commission will approve general measures – such as guarantee schemes for deposits and interbank loans – very quickly and if possible within 24 hours, if certain conditions are met. To qualify for this fast-track procedure, the Member State must show that the intended scheme is targeted and proportionate to the objective of stabilizing financial markets, and the scheme must contain safeguards against unnecessary negative effects on competition. Once an individual bank takes advantage of a general guarantee scheme, receives a capital injection, or transfers bad loans to governmental entities, the Member States granting aid must provide the Commission with information on the specific restructuring plan. This is the normal procedure under the Commission’s guidelines on restructuring aid.

The Commission has also announced that, in reviewing notifications, it will distinguish between those banks whose only problem is that their solvency is threatened by the current crisis and those banks that have pre-existing structural problems. In practice, this means that banks with pre-existing problems will have to dispose of significant parts of their business, whereas banks that only have short-term solvency problems will be allowed to carry on their business without drastic cuts in their activities. This is bound to lead to legal uncertainty and controversy.

Under the state aid rules, a statute of limitations of ten years from the grant of an aid applies; thus, beneficiaries of aid that does not comply with the rules run the risk of possible challenges for a long period of time.

Read text of the Commission Communication of 13 October 2008 here.