Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.2.3:1.2.3 The reform of the State aid regime for the banking sector

Public funding of failing banks in the European Union (LBF vol. 19) 2020/1.2.3

1.2.3 The reform of the State aid regime for the banking sector

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At the onset of the GFC, the only instrument available at EU level to deal with failing banks and their return to viability in an orderly manner was State aid control by the Commission.1

During the GFC, ‘taxpayers’ money’ was the main source of funding for failing banks, because access to other funding resources was not secured. There were no supranational funds available, such as the SRF or the European Stability Mechanism (ESM), and shareholders and creditors of banks could not be forced to contribute to failing banks (other than through the liquidation of a bank). The only other funding resources that were available at the time of the GFC were ELA awarded by the national central banks (within the Eurozone as part of the Eurosystem) and contributions from national deposit guarantee schemes, albeit that there was a lack of a uniform regime within the EU.

The need for a strong State aid control regime became – utterly – obvious at the start of the GFC. The Commission had to deal with the threat to financial stability, while maintaining strict controls on the granting of State aid. In the early days of the crisis, the Commission found the solution to this challenge in the Communication on State aid for rescuing and restructuring firms in difficulty (the 2004 R&R Guidelines).2 The Commission used the criteria set out in these guidelines to assess the State aid awards in the banking sector on their compatibility with the internal market. 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. The 2004 R&R Guidelines therefore required adaptation to the crisis situation. Between 2008 and 2011, the Commission published six communications (the Crisis Communications) containing a tailored framework for State aid control for banks in difficulty that fol lowed the general principles laid down in the 2004 R&R Guidelines. The Crisis Communications did not contain new rules, but allowed for the adjustment and sharpening of the Commission’s practice in relation to its assessment of State aid awards to failing entities.3 The Commission used the Crisis Communications to coordinate the responses of Member States, to preserve a level playing field in the banking sector, and to make sure that bail-outs were carried out according to similar conditions across the EU.4 Between 2007 and 2014 the Commission took more than 450 State aid decisions determining the restructuring – or winding up in an orderly manner 5 – of 112 EU banks.6

While the contours of the European Banking Union were taking shape, the Commission started with its review of the Crisis Communications.7 With the introduction of the new resolution framework in the form of the BRRD and SRMR, the role of State aid control in the banking sector had to be revisited and State aid control had to be embedded in the resolution framework. As it was no longer necessary for the Commission to act as the de facto resolution authority, the Commission was able to refocus on the impact of State aid on competition within the EU.8 In August 2013, the Commission adopted the 2013 Banking Communication, in which it consolidated and strengthened the State aid regime for the banking sector.9

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