CALL FOR EVIDENCE

FOR AN EVALUATION

Title of the evaluation

Evaluation of State aid rules for banks in difficulty

Lead DG – responsible unit

DG Competition – Units D3-D4

Indicative timetable

(planned start date and completion date)

Start date: Q1-2022

Planned completion date: Q3-2023

Additional information

Policy area: https://ec.europa.eu/competition-policy/sectors/financial-services_en 

State aid rules for banks in difficulty: https://ec.europa.eu/competition-policy/sectors/financial-services/legislation_en

This document is for information purposes only. It does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content. All elements of the initiative described by the document, including its timing, are subject to change.

A. Political context, purpose and scope of the evaluation

Political context

Since the start of the financial crisis in 2008, the Commission has developed a dedicated set of rules for assessing State aid (government support) to banks in difficulty. These rules were specifically designed to address the effects of the crisis and avoid knock-on effects from bank failures in the financial sector and the economy in general.

In the absence of a uniform regulatory framework following the financial crisis, State aid rules provided the main policy response to consistently and effectively tackle bank failures across the EU. The aim was to ensure financial stability, to avoid major disturbances in the EU banking sector and to ensure that people could access their bank accounts and that banks continued to provide payment services and lending to the real economy. These State aid rules also aimed at ensuring a level-playing field by mitigating competition distortions between banks and across Member States, inter alia through limiting the amount of State aid.

Since 2008, the Commission has revised, updated and expanded these State aid rules several times, to take into account the evolution of the financial crisis and lessons learned from applying the rules.

The current rules are set out in six Commission communications, of which the most recent and comprehensive was the 2013 Banking Communication.

The six communications set out the principles the Commission applies when assessing State aid granted to banks in difficulty. The three main principles are:

I.minimising competition distortions due to granting State aid to banks in difficulty; 

II.restoring the long-term viability of the supported banks through restructuring (or if this is not possible, ensuring they exit the market in an orderly fashion); 

III.ensuring that shareholders and selected creditors of a supported bank bear part of the losses (“burden-sharing”), to minimise the amount of State aid, thereby protecting taxpayers and discouraging excessive risk-taking by banks, their shareholders and creditors.

There is now a need to evaluate these rules, as set out below.

First, since the rules were last revised in 2013, the regulatory environment in which EU banks operate has changed significantly:

·A new set of EU rules – the “bank crisis management framework” – were put in place in 2014 to manage bank crises, preserve financial stability and protect depositors.

·The EU’s micro-prudential framework has been strengthened.

·The first two (of three) pillars of the Banking Union (for euro area countries and those opting in) were established: the institutional mechanisms for centralised supervision and resolution of banks.

Since 2015, the bank crisis management framework and the State aid rules for banks in difficulty have applied in parallel, each referring to each other but following their own underlying logic. However, the new regulatory environment leads to interactions and interdependencies between the exercise of State aid control by the Commission and the actions of bank supervisors and resolution authorities. Moreover, the bank crisis management framework is currently subject to review.

Second, market realities have also evolved. The financial crisis that started in 2008 has abated. At the same time, there are still important pockets of vulnerability related to banks in some EU countries, while new risks for the EU banking sector have emerged.

Furthermore, the persistent, ongoing COVID-19 crisis produced a major shock to EU economies, the effects of which have not yet fully crystallised and could further affect the EU banking sector, requiring a swift response and highlighting the ongoing relevance of effective State aid control.

In conclusion, given the overhaul of the regulatory framework and the evolution of the market conditions, an evaluation of the State aid rules for banks in difficulty is now warranted. This is also in line with the Commission’s commitment in the 2013 Banking Communication to review its State aid rules for banks as deemed appropriate, and in particular to cater for changes in market conditions or in the regulatory environment which may affect those rules. An evaluation of the rules was also recommended in the October 2020 European Court of Auditors’ Special Report on the control of state aid to financial institutions in the EU.

Purpose and scope

Purpose 

This evaluation will analyse how the State aid rules for banks in difficulty have functioned over time and to what extent they have preserved financial stability in the EU single market, while ensuring a level playing field by mitigating competition distortions.

In particular, the evaluation will assess to what extent the rules:

·ensured the effective restructuring of viable banks and orderly market exit of unviable banks, where one or more banks were in difficulty;

·helped discourage excessive risk taking (moral hazard), through burden-sharing measures;

·were able to mitigate competition distortions caused by the granting of aid.

The evaluation will also assess to what extent the current rules are still fit for purpose, especially in the context of the new regulatory environment, and whether there is potential to simplify them or improve their coordination with the bank crisis management framework.

Scope

The evaluation covers all relevant communications setting out State aid rules for banks in difficulty:

·2008 Banking Communication (repealed)

·2009 Recapitalisation Communication 

·2009 Impaired Assets Communication

·2009 Restructuring Communication

·2010 Prolongation Communication

·2011 Prolongation Communication

·2013 Banking Communication)

It will not cover:

·the 2009 Temporary Framework for State aid measures to support access to finance in the current financial and economic crisis (expired at the end of 2011, following a prolongation Communication);

·the 2020 Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (still applicable).

Timeframe & content

The evaluation covers the period since the entry into force of the 2008 Banking Communication up until the present day.

It will cover all possible types of aid granted to banks in difficulty under these rules (i.e. liquidity aid, restructuring aid, aid to deal with impaired assets, and liquidation aid) by any EU country, and how this aid has evolved over time.

Evaluation criteria

The evaluation will assess five main criteria, each with subsidiary questions, as follows:

Effectiveness 

·To what extent have the rules achieved their objectives (financial stability and mitigation of competition distortions between banks and across countries)?

·To what extent have they contributed to reinforcing market discipline and tackling moral hazard, in particular through adequate burden-sharing measures?

·To what extent have they helped restructure banks in difficulty and restore their long-term viability, or helped the market exit of unviable banks in an orderly fashion?

·Have there been any unexpected results or unintended consequences of implementing the rules?

Efficiency

·Have the benefits achieved been in proportion to the incurred costs?

·To what extent have the requirements under the rules been proportionate to the cost of complying, e.g. regarding burden-sharing?

·Have the rules been clear over time?

·Has the existence of aid schemes under these rules helped simplify the administration?

Relevance

·To what extent have the rules remained relevant over time, against the background of macroeconomic, market and regulatory changes?

Coherence

·To what extent do the different Commission communications setting out these rules complement each other, rather than leading to contradictions?

·To what extent are the rules consistent with other EU policies and legislation that apply to failing banks, especially the bank crisis management framework?

EU added value

·To what extent have the rules ensured EU added value for stakeholders?

·To what extent have the rules ensured a coordinated policy response by EU countries to the financial crisis?

B. Better regulation

Consultation strategy

The consultation activities will include:

·A 12-week online public consultation aimed at the general public (launched as part of this call for evidence), featuring broad, high-level questions translated into all 24 official EU languages. Respondents will be able to submit replies in all 24 official EU languages. The public consultation will be accessible through the Commission’s Have your say web portal.

·A 12-week targeted consultation aimed primarily at selected stakeholders directly involved in or affected by the Commission’ State aid control for banks in difficulty or with relevant expertise in the field of State aid control, the analysis of competition in the financial sector and financial stability.

This consultation will feature specific questions of a more technical nature and will be available in English only. However, respondents will be able to submit replies in all 24 official EU languages. This consultation will be accessible through DG Competition’s consultations webpage.

Apart from the above-mentioned websites, the consultation activities will be promoted through the Commission’s official communication channels (including social media) and at selected events and in speeches.

The results of the public consultation will be made public in a factual summary report to be published on the Commission’s Have your say site.

A summary of the results of both planned consultation activities will be reflected in a synopsis report that will be annexed to the Staff Working Document covering the evaluation.

Why we are consulting?

To collect evidence and views on the effectiveness, efficiency, relevance, coherence and EU added value of the rules in question.

The consultation is important, because these rules have been only partially evaluated in the past, without consulting all stakeholders.

In particular, the consultation may shed light on unknown, unexpected and unintended consequences of financial-sector State aid control, in particular in the context of the new regulatory framework.

Target audience

Stakeholders include national public authorities in the EU (in particular, ministries of finance, supervisors, resolution authorities, competition authorities, regional and local authorities), EU institutions and agencies, international organisations, aided and non-aided EU banks, banking industry associations, financial sector and market participants (e.g. investors, analysts, auditors), researchers & academia, consultancy, law firms, private companies and citizens (in particular in their capacity as bank customers, employees or retail investors).

Data collection and methodology

The rules have been evaluated internally, both by the Commission and other institutions, with regard to certain aspects:

·a 2011 Commission Staff Working Document on the effects of temporary State aid rules adopted to counter the financial and economic crisis;

·a 2015 Commission Competition State Aid Brief looked into the effectiveness of State aid measures to restore banks’ long-term viability through restructuring;

·a 2011 European Parliament study on State aid crisis rules for the financial sector and the real economy;

·a European Court of Auditors’ Special Report on the control of State aid to financial institutions in the EU, which highlighted the need to analyse more thoroughly the impacts of the Commission’s State aid decisions and notably the measures to limit distortions of competition;

·a 2017 Commission Staff Working Document on EU and national policy responses to the financial crisis during the period 2008-2015.

Further to this existing evidence, the Commission aims to collect views and additional evidence through the public and targeted consultations and an external study.

This study will be performed by an external contractor from the second half of 2022. The contractor would mainly be required to:

·produce quantitative and qualitative evidence on the effectiveness and efficiency of measures to mitigate competition distortions and restore the long-term viability of fundamentally viable aided banks, and on the effectiveness of burden-sharing measures to strengthen market discipline and fight moral hazard;

·assess the evolution of indicators on financial stability in selected EU countries and at aggregate EU level, and perform a quantitative and qualitative analysis of the extent to which such indicators were influenced and/or correlated with the State aid control for banks in difficulty over the evaluation period. This assessment will be complemented with a description of how the degree of competition and performance of the EU banking sector has evolved, from a State aid perspective.

The report on the study will be annexed to the evaluation.

The consultation activities and the study will be complemented by:

·available statistical data on the banking industry;

·State aid scoreboard data;

·the Commission’s extensive case practice experience (including internal data aggregation);

·relevant insights from the evaluation of the bank crisis management framework conducted in the first half of 2021 (in particular feedback to its public and targeted consultation, part of the ongoing review of the bank crisis management framework).