GCLC February 2009 State Aid response to the European banking crisis Blanca Rodriguez Galindo European Commission Competition Directorate General

Summary Overview of the State Aid Control rules Short History of State Aid Control in the banking sector August 2007, the beginning of the Banking Crisis and the Commission reaction September 2008, intensification of the Banking Crisis and the need for appropriate responses A new legal framework The Banking Communication Rescue banking plans, some figures (September- December 2008) The practice so far, benchmarks and safe harbors The near future Conclusion

Overview of the State Aid Control rules General prohibition of State Aid : Article 87 of the EC Treaty …subject to exceptions: – Article 87 3 b for measures to remedy serious disturbance of the economy – Article 87 3 c for measures addressing companies in difficulties

Short history of State Aid Control in the banking sector Banks in difficulty, unable to stem losses by themselves Rescue aid to keep bank afloat for the time needed to work out a restructuring/liquidation plan: – temporary (6 months) – reversible Restructuring aid which aim is to restore long-term viability: – restructuring plan – compensatory measures to avoid undue distortions of competition – own contribution from beneficiary to limit aid to the minimum Examples: Credit Lyonnais ( 1998 ) Bankgesellschaft Berlin (2004) BAWAG (2007)

Individual cases in a few Member States Northern Rock (UK), Sachsen LB(G), IKB (G), WestLB (G), Bayern LB (G), Roskilde (DK) Calls for a new legal basis : Article 87 3b)… …use of the classical legal framework, Article 87 3 c) and Rescue/Restructuring assessment Rapid treatment August 2007, the beginning of the Banking Crisis and the Commission reaction

Sound banks not technically in difficulties affected Confidence problem Interbank lending has dried up General rescue schemes rather than measures aimed at individual banks Stability of the financial system at stake September 2008, intensification of the Banking Crisis and the need for appropriate responses

A new legal framework Measures to remedy a serious disturbance of the economy= Art 87 3 b – Exceptional application – Systemic crisis - beyond the crisis of a single firm Need to allow different measures / derogations from R&R guidelines: – Measures for banks that are not technically in difficulties – Structural emergency interventions – Protection of rights of third parties such as creditors – Rescue measures potentially going beyond 6 months

The Banking Communication Measures covered: – Guarantees – Recapitalisation – Winding-up – Liquidity assistance General principles: – Non-discrimination – Limitation in time – Aid limited to the minimum – Contribution from beneficiaries – Behavioral commitments – Structural adjustments

Denmark (Guarantee) - 10 October 2008 Ireland (Guarantee) - 13 October 2008 United Kingdom (Combination)- 13 October 2008 Germany (Combination)- 27 October 2008 Portugal (Guarantee) - 29 October 2008 Sweden (Guarantee) - 29 October 2008 France (Refinancing) - 30 October 2008 Netherlands (Guarantee) - 30 October 2008 Spain (Purchase of assets) - 4 November Italy (Guarantee) - 13 November Finland (Guarantee) - 13 November Greece (Combination)– 19 November France (Recap)- 8 December Austria (Combination) – 9 December Slovenia (Guarantee) – 12 December Spain (Guarantee) – 22 December Latvia (Guarantee) – 22 December Italy (Recap) – 23 December …and more to come Rescue banking plans, some figures – I (February 2009)

A number of individual cases approved, such as Recapitalisation (ING, KBC, PAREX, SNS Reaal, Bayern LB, Anglo Irish Bank), Guarantees (FORTIS, DEXIA, NORD LB, IKB), liquidity (Carnegie) and One insurance firm recapitalisation (AEGON) Rescue banking plans, some figures – II (February 2009)

Temporal scope  Maximum 2 years or window of 6 months of debt lasting 3 to 5 Years  Existing debt or only new debt Material scope  Most types of liabilities including wholesale deposits and short term deposits  In principle not subordinated debt but senior debt Level of remuneration, ECB Recommendations of 20 October 2008  Maturities exceeding 1 year, 50 basis points+ median of CDS spreads over last 20 months  Maturities of up to 1 year, flat fee of 50 basis points Behavioral constraints  Restrictions on commercial conduct  Prohibition of Conduct irreconcilable with purpose of the guarantee  Limitation to expansion in particular size of balance-sheet The practice so far, benchmarks and safe harbors (I). Guarantees

Preference for Repo in case of Toxic assets Final Purchase in case of high quality assets Pricing as close as possible to market price, auction In case of Repo and toxic assets payment of initial sales prize plus premium The practice so far, benchmarks and safe harbors (II) Purchase of assets

The practice so far, benchmarks and safe harbors (III) Liquidity assistance General measures open to all comparable market players (eg lending to the whole market on equal terms; standing facilities by Central Bank) are not State aid Individual emergency liquidity assistance is not State aid if:  Beneficiary is solvent and the assistance is not part of a larger package  The facility is fully secured by collateral to which haircuts are applied  Penal interest rate  Measure is taken at the Central Bank´s own initiative and not counterguaranteed by the State Other cases State Aid but can be found compatible

The practice so far, benchmarks and safe harbors (IV) Recapitalisation After number of cases, need for general guidance: Communication of 8 December. Recap open for all banks in current environment, but distinction is made between « sound » and « distressed » banks, based on banks’ risk profile and size of capital injection Important elements are pricing & and exit incentives (such as step-up clauses over time, higher capital repayment and dividend restrictions) A complete dividend ban and a restructuring plan has to be approved for distressed banks (for sound banks, the soundness has only to be demonstrated in a ex-post report)

New measures: treatment of impaired assets ECOFIN 10 February: – Correct & consistent approach of valuation for level playing field – Banks to keep portion of risk to limit moral hazard – Some flexibility as regards asset choice but full transparency – Close implementation monitoring – Commission to ensure compliance with state aid rules & restructuring requirements

The Near future Review of the measures Assessment of the adequacy of the measures and of their distortive effects Restructuring and return to viability process

Conclusion “State aid rules are part of the solution not of the problem” “Flexibility doesn’t mean throwing out the rules” Neelie Kroes