This chapter analyses the special nature of banks, and how the importance of the banking sector and its stability overlaps with the preservation of competitive banking markets. Banks have a unique standing in the economy, and are regarded as more vulnerable to instability than other firms as they provide liquidity and are involved in inter-bank lending markets and the payment system. Due to the systemic nature of banks, governments try to avert a crisis that can affect the whole banking sector by ensuring that banks which are ‘too big to fail’ remain sustainable. Such intervention has a distortive effect on competition, as it prevents ‘self-correction’ of the market. State aid measures that characterized the response of regulators in the recent financial crisis were based on the premise of the special nature of the banking sector and its importance to the economy. In addressing the special nature of banks the chapter looks into the approach adopted towards banks under State aid control, tackling issues such as ‘too-big-to-fail’ and the BRRD and SRM.
Joanna Gray and Francesco de Cecco
This chapter explores the challenges presented by the interplay between State aid control and financial regulation. While, during the financial crisis, State aid law and policy demonstrated remarkable openness towards the conceptual toolkit of financial regulation, the uncertain contours of concepts such as systemic risk and moral hazard affected the degree of congruence between theory, policy and practice. What is more, the presence of multiple regulatory objectives tended to present the European Commission with some difficult trade-offs in attempting to pursue stability, the prevention of moral hazard and the preservation of lending to the real economy simultaneously, while attempting to minimize distortions of competition.
Since the beginning of the financial crisis, the European Commission has acted quickly by flexibly adapting the application of State aid control to the special crisis context. Between 2008 and 2013, the Commission adopted seven communications that provide a comprehensive framework for common conditions at EU level for access to public support and the requirements for such aid to be compatible with the internal market in light of State aid principles. This chapter presents the evolution of the legal framework of State aid law and the developments introduced by the seven communications. It also presents the interaction between the State aid rules and the new resolution framework (Bank Resolution and Recovery Directive and Single Resolution Mechanism).
While most of the public support of financial institutions granted during the crisis period was deemed State aid, there were still a few instances in which public support escaped this qualification. This chapter examines the conditions under which public funding of banks does not constitute State aid, with particular emphasis on the application of the market economy investor principle (MEIP) to banking. It describes the main aspects of the MEIP, refers to the role of the European Central Bank in defining the rates of remuneration that would be acceptable to a private investor, and reviews the main contentious issues arising from application of the MEIP. It also refers to other public measures which do not constitute State aid other than by conforming with the behaviour of a hypothetical private investor.
François-Charles Laprévote and Florine Coupé
In the early days of the financial crisis, the Commission’s review of State aid granted to banks in order to remedy serious threats to a national economy was still in its infancy. However, the length and intensity of the crisis resulted in a tailored-made and detailed ‘Crisis Framework’. This chapter outlines the various measures used by Member States to support their banks facing financial difficulties, e.g., recapitalization, impaired assets measures, guarantees, and liquidity measures. This chapter also describes the applicable texts, the emblematic cases, and the Commission’s assessment of the main legal issues for each type of measure.
Sahar Shamsi, Pantelis Solomon and Nicole Robins
In response to the financial and economic crisis, the European banking system received a significant amount of State funds, and allowed a wide range of rescue and restructuring measures to ensure financial stability. As State aid rules in the banking sector evolved to reflect the nature of the crisis, the policy towards compensatory measures, which are designed to limit any distortions to competition created as a result of the aid, has changed over time. This chapter considers the wide range of compensatory measures that have been introduced, how the approach to compensatory measures has changed over time and whether the measures have met their stated intentions.
François-Charles Laprévote and Sven Frisch
When the financial crisis struck, the European Union lacked a comprehensive supranational regulatory and bank resolution framework. While EU-based banks operated on a cross-border basis, crisis management and resolution tools remained national in scope. Using the concept of the ‘financial trilemma’, we argue that the Commission’s crisis-time State aid policy sought to fill this void by both leaving Member States enough leeway to restore financial stability and coordinating their interventions to preserve cross-border banking, in line with constitutional market integration objectives. But the limits of State aid law and an often reactive approach to national interventions meant that the scope, overall coherence, and effective contribution of the Commission’s State aid decisions to market integration objectives varied from case to case.