European Commission guidance on bank aid schemes

DG Competition paper (7 pages, PDF) on “the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis”. This encourages Governments to refer to Article 87(3)(b) to justify bank rescue schemes as being necessary “to remedy a serious disturbance in the economy of a Member State” and discusses examples of application of the principle of proportionality to guarantees, recapitalisation, winding-up and liquidity assistance.

The Commission has approved the UK scheme and the Republic of Ireland deposit guarantees on that basis.

The notice focuses on schemes such as the UK recapitalisation and guarantee scheme. It does not appear to apply to cases of bank nationalisation/rescue where the Government's objective was not to remedy a serious disturbance — for example the Northern Rock case, which is being handled like any other company rescue/restructuring.

The notice mentions the potential need for limitations on the growth of aided banks, but does not suggest a particular way of doing it. It lists as possible “behavioural constraints ensuring that beneficiary financial institutions do not engage in aggressive expansion against the background of the guarantee to the detriment of competitors not covered by such protection”:

Restrictions on commercial conduct, such as advertising invoking the guaranteed status of the beneficiary bank, pricing or on business expansion, e.g. through the introduction of a market share ceiling (the retention of profits in order to ensure adequate recapitalization could also be an element to be considered in this context).

Limitations to the size of the balance-sheet of the beneficiary institutions in relation to an appropriate benchmark (e.g. GDP or money market growth) (while safeguarding the availability of credit to the economy notably in case of recession).

The prohibition of conduct that would be irreconcilable with the purpose of the guarantee such as, for example, share repurchases by beneficiary financial institutions or the issuance of new stock options for management.

Update, 29 October 2008: The URL and formatting and number of pages of this document have been changed following its appearance in the Official Journal.

For further information or advice please contact Franck Latrémolière.

Filed under DG Competition, State aid.

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