State Aid Support to Financial Institutions and the Question of Systemic Importance in the 2008 Financial Crisis: Time for a New Approach?

Abstract

What is or is not a systemic important bank in times of financial crisis? Such a question is not easy to answer when the demise of even peripheral financial institutions in one country may trigger financial turmoil in others via a domino effect. From a State aid perspective, the question of systemic importance was not adequately addressed during the 2008 financial crisis as the Commission and Member States sought a flexible solution to a complex problem. This solution manifested itself via the continued transfer of taxpayers’ money to insolvent financial institutions simply to maintain the financial stability of other financial institutions. Therefore, the aim of this Paper is to critically assess the Commission’s application of State aid rules to the banking sector and propose a new systemically important test for financial institutions that is rooted in the State aid law domain. As part of this process the level of aid that should be provided to a financial institution deemed systemically important will also be examined as will the need for new competition distortion safeguards to ensure that supporting an insolvent but systemically important bank does not undermine the market position of long-term viable competing financial institutions. The overarching objective of this research is to formulate a future State Aid Crisis Framework for the banking sector that strikes the correct balance between maintaining financial stability and protecting taxpayer resources. In conjunction to this the paper also seeks to examine how a new State Aid Crisis Framework will interact the Bank Resolution and Recovery Directive and whether a new approach could be designed to maintain financial stability in a financial crisis while also ensuring that Member State’s resources are not continually at the beck and call of recipient financial institutions.