On 13 October 2008 the Commission published guidelines (in the form of a Communication) on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis. The guidelines provide for a fast track clearance procedure under which decisions will be adopted within 24 hours, whereas a rescue aid application would normally take several months to be dealt with (even though the aid has been given because of extreme urgency). Bank guarantee packages from the British, Irish and Danish governments have already been approved under the new procedures.

Background 

At the Finance Council Meeting on 7 October the EU finance ministers committed 'to take all necessary measures to enhance the soundness and stability of the banking system in order to restore confidence and the proper functioning of the financial sector'. Ministers agreed that public intervention has to be decided on a national level, but within a coordinated framework and on the basis of a number of EU common principles. The Commission offered to issue guidance as to the broad framework within which the State aid compatibility of recapitalisation and guarantee schemes, and cases of application of such schemes, could be rapidly assessed. While recognising that the exceptional circumstances prevailing at the moment have to be taken into account when applying the State aid rules to measures addressing the crisis in the financial markets, the Commission is keen to ensure that such measures do not distort competition between financial institutions or create any negative spill-over effects in other Member States.

Key features of the guidelines

The guidelines are based on the principles underpinning the existing Rescue and Restructuring Guidelines, taking into account the particular circumstances applying to the financial sector in the context of the current exceptional crisis. They confirm that aid in this context may be treated as discretionary aid under Article 87(3)(b) EC Treaty, namely aid "to remedy a serious disturbance in the economy of a Member State", as long as the crisis situation justifies this. Generally this head will be available for general schemes available to all or several financial institutions where a Member State has declared there is a risk of such a serious disturbance.

It is not ruled out that ad hoc interventions may fall under this head, but the normal rules on rescue and restructuring aid are more likely to apply in such cases. In any event the general principles on rescue and restructuring aid continue to apply, but it is recognised that interventions lasting beyond the six months normally allowed for rescue aid will be needed. The duty to produce plans (in the nature of restructuring plans) for beneficiary undertakings within six months remains and reports to the Commission will be required every six months.

It is also emphasised that the normal rules continue to apply strictly in sectors other than finance which do not, at present, pose the same structural risk. An important consideration is the separate treatment of illiquid but otherwise sound financial institutions and those which are suffering from inefficiencies, poor asset management or risky strategies. The latter would fit within the normal framework for rescue aid, whereas fundamentally sound institutions can be treated under these guidelines as this is likely to have limited effects on competition. As with all aid, measures must be demonstrated to be

  • well targeted to achieve the objective of remedying a serious disturbance in the economy; 
  • proportionate to the challenge faced, not going beyond what is required to attain this effect; and 
  • designed to minimise negative spill-over effects on competitors, other sectors and other Member States.

Type of aid envisaged

Guarantees covering liabilities of financial institutions covering either retail deposits or types of debt which are the subject of serious market difficulties - The example given for other debts which could be guaranteed is interbank lending, where the market has dried up. This is in line with action being taken in the UK and some other Member States. The Directive on depositor guarantee schemes does, of course, allow for indefinite schemes for retail depositors, but durations of up to two years are suggested as likely to be acceptable for other justified interventions, but with six monthly reviews of whether they remain necessary, with some possibility of covering debts for their contractual term, even where this would expire outside the two year window.

Guarantees covering liabilities of a single institution - Aid of this type only for a single institution will be more harshly judged, because of its greater ability to distort competition and the Commission could be expected to focus on whether this was indeed a fundamentally sound institution.

Recapitalisation of financial institutions - The general points applicable to guarantee schemes carry across, but there is an emphasis on the need for objective criteria for participation, and that beneficiaries should contribute as much as they can themselves: eg by raising money through rights issues, as is a feature of the UK recapitalisation scheme. In addition there is a requirement that the State receives value through the investment it makes: preferred shares with adequate remuneration are mentioned as a prime example of how this may be achieved.

Buying of assets - This should be done at a valuation which reflects underlying risk and gives no undue discrimination to sellers.

Other forms of liquidity assistance - The Guidelines mention that these may be justified if of wide application and falling within the State aid rules. They recognise that many general measures are an aspect of monetary policy and outside the State aid rules.

Controlled winding up - In addition, the Guidelines deal with the aid measures in the context of the controlled winding up of financial institutions. This may follow on from rescue aid or take place in a single action. Where parts of a business are sold, the following conditions apply:

  • The sales process should be open and non-discriminatory;
  • The sale should take place on market terms; 
  • The sales price should be maximised; 
  • If aid is to be given to the business being sold, this must meet normal rescue and restructuring aid guidelines. 

There are other specific concerns:

  • Where any category of creditors is to be reimbursed through aid measures, the same criteria should apply as for a guarantee scheme; 
  • The liquidation period should be as short as possible to minimise distortion of competition; 
  • Moral hazard (eg arising from exclusion of shareholders and some creditors from aid altogether) should be minimised.

Comment

The guidelines represent a useful contribution to understanding the Commission's approach in the current circumstances and assisting the resolution of the crisis. According to Commissioner Kroes they demonstrate how the State aid rules form an important part of the solution to the current problems on the financial markets. She has indicated that the Commission will take a similar approach in respect of merger control, taking into account the evolving market conditions and, where applicable, the failing firm defence. The existing rules allow the Commission to grant derogations from the standstill obligation, pending a definitive outcome of the proceedings, in order to enable the immediate implementation of transactions which are part of rescue operations.