COMPETITION LAW

Competition Law



Competition Law

State Aid To The Financial Sector

In our previous credit crunch updates, we have provided an overview of the European Commission's response to State aid to the financial sector in the context of the current financial and economic crisis. Here, we discuss further developments since the end of 2008 in the provision of State aid to financial institutions in the context of the credit crunch. A fuller summary of the Commission's State aid decisions can be found here.

The beginning of the crisis saw rescue aid being granted to save individual financial institutions from insolvency (such as Northern Rock and West LB), followed by a second wave of such rescues after the collapse of Lehman Brothers in September 2008 (such as Bradford & Bingley and Hypo Real Estate). This aid was granted under the existing Rescue and Restructuring Guidelines under the exemption for aid for the development of certain economic activities (Article 87(3(c) of the EC Treaty).

Towards the end of 2008 the unprecedented scale of the liquidity crisis and the urgent need for State funds to safeguard the financial system from collapse became apparent. The Commission issued a framework "Banking Communication" on 13 October 2008 followed by a "Recapitalisation Communication" on 5 December 2008, which outlined acceptable conditions for Member States' financial rescue packages aimed at shoring up fundamentally sound institutions, such as recapitalisation and credit guarantee schemes. Such aid was granted under the exemption for aid to remedy a serious disturbance in the economy of a Member State (Article 87(3)(b) of the EC Treaty).

Since the end of 2008 the flow of State aid decisions in the wake of the credit crunch has far from abated and there have been a number of developments in this area.( Simon, 2003)

Financial Support And Restructuring

A restructuring plan must be notified when a bank receives rescue aid, calls upon a guarantee granted under a guarantee scheme, has required emergency recapitalisation or where it has otherwise been agreed with the Commission as a condition of individual liquidity aid being granted. In most cases, the plan must be notified within 6 months of the aid being granted.

The Commission has stated that it is currently finalising guidelines on restructuring financial institutions (although this has been announced and postponed several times). It is understood the new guidelines will be based on the principles of the current Rescue and Restructuring Guidelines, amended to take into account the financial crisis, for example by placing substantially less emphasis on the need for a bank's 'own contribution' to the restructuring due to the difficulties of access to capital.

The Commission has recently launched investigations into a number of such restructuring schemes including those relating to Hypo Real Estate, Dexia and Fortis Bank. In addition, the restructuring plans of Northern Rock and BayernLB are still under investigation. The first decisions on these restructuring plans have also been made relating to Commerzbank and West LB.

It is apparent that particular concerns of the Commission relate to:

(i) ensuring the amount and duration of the aid is ...