Managing State Aid in a Time of Crisis: Commission Crisis Communications and the Financial Sector Bailout

Abstract

The September 2008 collapse of American investment bank Lehman Brothers triggered a global financial crisis whose effects were quickly felt in European banking. The scale of the crisis and the speed with which it propagated through the sector prompted governments to take aggressive action. In the months following the onset of the crisis, EU governments approved guarantee schemes, recapitalizations, and asset relief measures worth over €4.5 trillion. Such vast amounts of aid, necessary though it may have been, threatened to distort competitive conditions in the sector. To forestall this, the European Commission issued four ‘crisis communications’ in which authorities set out how member states could best support financial institutions whilst respecting EU competition rules and thus avoiding undue distortions of competition. We argue that these guidance documents, though only non-binding soft law, not only helped preserve competition in the banking sector but also provided a policy resource that Commission authorities have used to restructure the banking sector.

Key Words:

• Financial crisis
• competition policy
• soft law
• state aid
• European Commission

Notes

1. Willem Buiter writing in his Maverecon blog on the Financial Times captured the mood this way: ‘Financial crises may not be the best time to make friends and influence people, but the Irish guarantee is the most “in-your-face” beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plague-ridden corpses into the cities they were besieging. Available at: http://blogs.ft.com/maverecon/2008/10/the-irish-solution-unlawful-beggar-thy-neighbour-and-short-sighted-but-apart-from-that-ok/.

2. Communication from the Commission — The Application of State Aid Rules to Measures Taken in Relation to Financial Institutions in the Context of the Current Global Financial Crisis, OJ C 270/8 of 25 October 2008.

3. Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty, OJ C 244/2 of 1 October 2004.

4. The Commission argued that the alternative legal basis was necessary due to the systemic nature of the crisis. Notes the Commission (2009, 10): ‘It seemed arbitrary to allow the application of Article [107.3.b] of the EC Treaty in case Member States were taking action as regards the entire sector or big systemic banks, while smaller banks would still need to revert to Article [107.3.c] of the EC Treaty’.

5. Communication from the Commission — The Recapitalisation of Financial Institutions in the Current Financial Crisis: Limitation of Aid to the Minimum Necessary and Safeguards Against Undue Distortions of Competition, OJ C 10/2 of 15 January 2009.

6. On a recommendation from the European Central Bank, the Commission reduced remuneration demands for fundamentally sound institutions to an average price corridor of 7 per cent to 9.3 per cent. See also, Recommendations of the Governing Council of the European Central Bank on the pricing of recapitalizations, 20 November 2008. Available at: http://www.ecb.eu/pub/pdf/other/recommendations_on_pricing_for_recapitalisationsen.pdf.

7. German finance minister Peter Steinbruck estimated that German banks were burdened by approximately €850 billion in impaired assets (Financial Times, 12 May 2009).

8. Communication from the Commission on the Treatment of Impaired Asses in the Community Banking Sector, OJ C 72/01 of 26 March 2009.

9. Commission approves recapitalization of Commerzbank, 7 May 2009 (IP/09/711).

10. Commission Communication on the Return to Viability and the Assessment of Restructuring Measures in the Financial Sector in the Current Crisis Under the State Aid Rules, OJ C 195/9 of 19 August 2009.

11. DG COMP Staff Working Document ‘The application of state aid rules to government guarantee schemes covering bank debt to be issue after 30 June 2010’. Available at: http://ec.europa.eu/competition/state_aid/studies_reports/phase_out_bank_guarantees.pdf.