State aid: European Union financial crisis rules for banks

The European Commission has produced a new set of temporary state aid rules to assess public support to financial institutions during the financial crisis.

ACT

Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (‘Banking Communication’) (OJ C 216 of 30.7.2013).

SUMMARY

New European Union crisis rules for state aid to banks during the crisis have been in force since August 2013. The new rules set out common EU conditions under which EU Member States can support banks with funding guarantees, recapitalisations or asset relief measures.

In the period that followed the collapse of Lehman Brothers, the European Commission adopted a comprehensive framework via the Banking Communication, the Recapitalisation Communication, the Impaired Assets Communication and the Restructuring Communication. The main idea was to establish the rules that allowed for the support of the financial sector during the crisis so as to ensure financial stability while minimising distortions of competition between banks in the European Union.

This framework of rules sets out common conditions at EU level for access to public support and the requirements for such aid to be compatible with the EU’s internal market in the light of state aid principles. The framework allows the European Commission to approve state support to remedy a serious disturbance in the economy of an EU Member State.

The main changes set out in the Commission’s Banking Communication of July 2013 are aimed at improving the restructuring process and ensuring a level playing field between banks.

Changes include:

• banks will not be able to receive recapitalisations or asset protection measures before their restructuring plan is approved by the European Commission
• in case of capital shortfalls, bank owners and junior creditors will be required to fully contribute as a first resort, before any injection of public money
• failed banks should apply strict executive remuneration policies. The new Banking Communication sets out a cap on total remuneration as long as the entity is under restructuring or relying on state support. This will give management the proper incentives to implement the restructuring plan and repay the aid.

BACKGROUND

Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak

last update 07.04.2020