The Application of the Principles of Restructuring Aid to Banks during the Financial Crisis

Abstract

The financial crisis and the responses to it from Member States and market participants have presented significant and unique challenges to the Commission’s state aid policy, both in terms of the volume and nature of the aid measures being implemented and the speed with which they have been proposed and market conditions have evolved. It is unsurprising then that the Commission’s approach to assessing state aid in the financial crisis has also evolved over the last 15 months, with apparently quite dramatic changes in both the substance and procedure of state aid control. After a period of a cautious approach between October 2008 and March 2009 with a strong focus on the stability of the financial sector, the Commission has increasingly tightened state aid control in the banking sector through the application of the principles of restructuring aid. These principles have been developed in the context of industries with overcapacity and often with firms suffering from idiosyncratic difficulties, and rely on assumptions which lead to results consistent with a proper effects-based analysis (albeit not an unstructured “rule of reason” analysis) in those cases. The banking industry during the current financial crisis, however, differs in fundamental ways from the earlier restructuring cases, in particular the under-supply of lending due to a general lack of confidence and the systemic causes of the recipient banks’ difficulties. As a result, several of the assumptions underlying the restructuring principles do not hold and the restructuring principles lead to a fundamentally different outcome then under an effects-based analysis. By applying the restructuring principles in a fundamentally different context, the Commission risks pursuing a policy which not only fails to achieve any benefits but which is highly likely to make a bad situation worse, harming consumers, the banking industry and the economy at large. The paper is structured as follows: Section 2 describes the causes and effects of the financial crisis in Europe while Section 3 summarises the Commission’s state aid policy response to the financial crisis from the days prior to the collapse of Lehman Brothers to the recent publication of the Financial Crisis Restructuring Guidelines. Section 4 provides a brief overview of the elements of an economics-based analysis which is subsequently applies to restructuring aid under Article 87(3)(c) (in Section 5). The rationale of “normal” restructuring aid cases is then contrasted with restructuring aid to banks in the financial crisis: Section 6 sets out the case for and the implications of an effects-based assessment of restructuring aid under Article 87(3)(b) while the following section looks at the impact of the Commission’s remedies. Section 8 concludes.