Today, the European Commission (EC) published a Commission Communication explaining its approach to assessing restructuring aid given by Member States to European banks. The Communication "provides a balanced framework for assessing restructuring aid with a view to restoring the viability of the beneficiary banks" and further "complements" the guidance on the assessment of state aid for banks that the Commission previously adopted concerning guarantees, recapitalization and the treatment of impaired assets.
The Communication is based on the following three fundamental principles:
- aided banks must be made viable in the long term without further state support;
- aided banks and their owners must carry a fair burden of the restructuring costs; and
- measures must be taken to limit distortions of competition in the Single Market.
In addition, the Communication emphasizes that "in order to devise strategies for a sustainable future," European banks will have to "stress test their business" which will require a diagnosis of the bank's strengths and weaknesses. This could result in a further review of the bank's business model and the bank's methodology in dealing with impaired assets, and could lead to the bank withdrawing from "loss making activities" or a recommendation that the bank be acquired by "a viable competitor" or wound up. Similar "stress tests" were conducted by the Federal Reserve this past May on the on the 19 largest U.S. bank holding companies pursuant to the Supervisory Capital Assessment Program.