State Aid Day State Aid Day Brno Brno April April European Commission, DG Competition STATE AID CONTROL IN THE FINANCIAL CRISIS Humbert Drabbe

2 European Commission, DG Competition The financial crisis and the DG COMP’s response in 4 stages A. Early days and the spill-overs of the sub-prime crisis: Rescue and Restructuring Guidelines B. The fall of Lehman and the inter-bank markets: First Banking Communication C. Drying up of credit for the real economy: Communication on Recapitalisation D. Early 2009; Tackling core issues: Dealing with impaired assets and restructuring

3 European Commission, DG Competition A. Early days and the spill-overs of the sub-prime crisis n Problem: From the end of 2007, some banks with extreme business models are hit by the subprime crisis (WestLB, IKB, Northern Rock, Roskilde etc.) n COMP response: Standard approach based on R&R guidelines

4 European Commission, DG Competition B. The fall of Lehman and the inter-bank markets n Problem: After Lehman Brothers defaults, sudden drop in confidence restrains inter-bank lending and threatens to lead to a financial meltdown n EU response on the use of MS support: – Commission banking communication (13/10) – ECB recommendations on pricing of guarantees (20/10)

5 European Commission, DG Competition DG COMP’s response: The Banking Communication (13 Oct 2008) – Guidance as to the design of MS measures in order to prevent: n Distortions of competition between banks in different need n Negative spill-over effects on banks in other Member States n Subsidy races n Outright discrimination on grounds of nationality – General principles: n Legal basis Art. 87(3)b n Limited in time n Distinction fundamentally sound / distressed banks n Normal principles apply

6 European Commission, DG Competition More specific guidance: n Objective and non-discriminatory access n Temporal scope scheme n Aid limited to minimum / private contribution n Avoid undue distortions of competition (behavioural constraints) n Follow up by adjustment measures n Individual cases: restructuring / liquidation

7 European Commission, DG Competition DG COMP‘s response: The Recapitalisation Communication (5 Dec 2008) n Outlines a framework for national measures in order to maintain a level playing field n Derives from the main objective of recap measures: to ensure lending to the real economy n Differentiation in treatment of fundamentally sound and distressed banks in relation to price, safeguards, and the extent of future restructuring n Which banks are fundamentally sound? – Entry gate that MS will have to monitor ex ante when deciding about the eligibility – COMM will monitor ex post when reviewing the schemes on the basis of MS’s reports – Set of indicators and a role for national supervisory authorities: capital adequacy, size of recap, current CDS spreads, rating & its outlook

8 European Commission, DG Competition The Recapitalisation Communication: Fundamentally Sound Banks n Remuneration to reflect: – Banks’ risk profile – Type of capital (subordination) – Exit incentives and safeguards against abuse – Risk-free rate benchmark n Entry price: – Euro-system methodology (20 Nov 2008) n Exit incentives: – Increasing remuneration, redemption clauses, link with dividends distribution n Safeguards: – Ban on aggressive commercial strategies, M&As by competitive tendering, use of capital for lending n Reporting & follow-up after 6 months: – Soundness of the banks, individual recaps conditions, use of capital for lending, path towards exit – Restructuring for distressed banks

9 European Commission, DG Competition Recapitalisation Communication: Banks not fundamentally sound n Higher risk – higher remuneration n Stricter safeguards (e.g. limitations on executive remuneration and bonus, maintenance of higher solvency ratio) n Follow-up: far-reaching restructuring (restructuring or liquidation plan to be assessed according to principles of the rescue and restructuring Guidelines)

10 European Commission, DG Competition D. Tackling core issues: Communication on Impaired assets n Problem: need to complement previous measures with a more structural action on impaired assets that prevent confidence and flow of credit to the real economy n Need for a consistent EU approach n Balancing immediate financial stability with return to normal market functioning n Cater for different situations across EU

11 European Commission, DG Competition Principles of designing asset relief measures under State aid rules (1) n Forms of relief measures: – asset purchase (“bad bank”), asset insurance, asset swap and hybrid solutions – free choice on the principle of equivalent treatment n Methodology: – Ex ante full transparency and disclosure prior to State intervention n Assets eligibility: – Flexibility as to the type of assets to cater for national specificities – Impaired at cut off date – Categorisation (asset baskets) n Assets valuation: – Independent third party’s certification & supervisory authorities’ validation – Bank’s viability review by supervisory authorities – Expert panel to assist the Commission n Aligning incentives to participate with public policy objectives – 6 months enrolment window when not mandatory

12 European Commission, DG Competition Principles of designing asset relief measures under State aid rules (2) n Asset management: – Prevent conflicts of interests (management & client separation) n Costs burden-sharing n Remuneration: – at least equivalent to the remuneration of State capital n Follow-up: – General principle of restructuring and return to viability

13 European Commission, DG Competition Summary: State aid for the financial sector – what has been done 50 + decisions ( → March 09) n 5 on-going second phase investigations n Several pending cases