3.2.2 Difficulties in the application of the 2004 R&R Guidelines in banking cases

Although the 2004 R&R Guidelines had been used with some success in a small number of cases involving State aid to banks before and in the early days of the GFC, they were not ideally suited to address large-scale interventions in the banking sector. Rescue and restructuring aid were often two parts of a single operation to deal with the problems in the banking sector during the financial crisis.1 It was therefore not always easy to make a strict distinction between rescue and restructuring. Sometimes it was required to already take certain restructuring measures in the rescue phase.2

In addition, the 2004 R&R Guidelines generally applied to all sectors.3 As a consequence, they did not cater for the particularities of the banking sector, such as the overriding importance of the cost of funds in determining the competitiveness of banks. They were designed to deal with a situation in which rescue and restructuring aid would harm competitors of the aid ed firm by denying them the additional market share that they could have won, if that firm had been allowed to collapse. In the banking industry, however, the failure of one bank, far from benefiting its competitors, is more likely to threaten their stability through contagion effects, meaning that individual banks could not be treated separately without also considering their interconnections.4 First, as banks have extensive expo sures to one another, losses of one will be borne by the others. Losses can spread directly through interbank exposures or indirectly through guarantees, credit lines, or insurance against credit risks that are being called. Secondly, pure informational contagion can arise such that the failure of one bank leads to an adjustment in the expectations regarding the viability of other banks that are perceived to be ‘similar’.5 Furthermore, the 2004 R&R Guidelines were drafted for the situation in which one individual firm was in difficulty. They did not anticipate the contagion effects inherent in financial crisis.6 The 2004 R&R Guidelines did also not cater for the granting of rescue and restructuring aid to banks that were otherwise fundamentally sound, but that had become unable to access credit on the financial markets.7

The conditions set out in the 2004 R&R Guidelines turned out to be impossible to comply with for banks that had to rely on rescue and/or re structuring aid. For example, given the fact that it was almost impossible to obtain contributions from third party investors in the markets, the require ment of an own contribution by the bank of 50% was deemed unrealistic by the Commission. In addition, it was the experience of the Commission that banks generally needed more than 2 years for the implementation of the restructuring plan due to the market circumstances.8 Also, the one-time-last-time was set aside.9 Lastly, the GFC required the swift adoption of decisions by the Commission on complete notification, if necessary within 24 hours and over a weekend.10 This implied a substantial short ening of the assessment period for the preliminary examination – which is normally two months. In order to cater for the needs of the banking sector, the Commission adopted the Crisis Communications.