Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.4.1.1:3.4.1.1 The primary law sources

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.4.1.1

3.4.1.1 The primary law sources

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The primary law sources for the State aid regime for the banking sector are Articles 107, 108 and 109 TFEU.

Article 107 TFEU

The basic substantive rules on the control of State aid in the EU are set out in Article 107 TFEU. Article 107(1) TFEU prohibits any form of State aid that distorts competition by favouring certain firms or the production of certain goods in so far as it affects trade between EU Member States. This prohibition is directed to the Member States and has been put in place to avoid subsidy races and to ensure a level playing field in the single market.1 The prohibition is not absolute. Article 107(2) and 107(3) TFEU provide a basis for the Commission to approve on the award of State aid.

The exemptions under Article 107(2) TFEU are mandatory. If State aid falls within one of these exemptions, the Commission has to approve the aid. It has no discretion in that respect. For example, aid making good the damage caused by natural disasters or exceptional occurrences falls under the exemptions of Article 107(2) TFEU. Another example would be aid having a social character, granted to individual consumers, provided that this aid is granted without discrimination related to the origin of the products concerned.2 Despite the fact that the exemptions in Article 107(2) TFEU are ‘automatic’ exemptions, the Commission still has to verify that the conditions laid down in Article 107(2) are met.3

On the basis of Article 107(3) TFEU the Commission may consider State aid compatible with the internal market. The Commission has a wide discretion in making an assessment whether any adverse effects are outweighed by other benefits under Article 107(3) TFEU. The categories of aid that may be considered compatible with the internal market under Article 107(3) TFEU are:

a)

aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349 TFEU, in view of their structural, economic and social situation;

b)

aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;

c)

aid to facilitate the development of certain economic activities or of certain economic areas, where this aid does not adversely affect trading conditions to an extent contrary to the common interest;

d)

aid to promote culture and heritage conservation where this aid does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest;

e)

such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.

The Council may also specify by decision, on a proposal from the Commission, categories of aid that may be considered compatible with the internal market under Article 107(3) TFEU, other than the categories set out under (a) to (d) of Article 107(3) TFEU.4

An example of the use of this power was Council Directive 90/684/EEC of 21 December 1990 on aid to shipbuilding. This Council Directive applied until 31 December 1995.

Article 108 TFEU

Article 108 TFEU sets out the procedures for the examination of State aid. These are different, depending on whether the aid is existing or new.

Under Article 108(3) TFEU new State aid must be notified to the Commission in sufficient time and may not be implemented until the assessment by the Commission has led to a final decision (the ‘standstill obligation’). If the Commission, following its assessment, considers that a State aid measure is not compatible with the internal market, having regard to Article 107 TFEU, the Member State concerned will have to abolish or alter this aid within a period of time to be determined by the Commission (Article 108(2) TFEU).5 The standstill obligation does not apply where aid falls within the scope of the General Block Exemption Regulation6, can be classified as de minimis aid7 or is covered by an authorised aid regime.8 The procedures that are followed by the Commission in order to assess new State aid are further specified in the Procedural Regulation of the Council9 and the Implementing Regulation of the Commission,10 as further discussed in section 3.4.1.2, and the case-law of the EU Courts.

Under Article 108(1) TFEU existing aid may be lawfully implemented as long as the Commission has made no finding of incompatibility.11 ‘Existing aid’, inter alia, includes authorised aid, that is to say, aid schemes and individual aid which have been authorised by the Commission.12 The Commission, in cooperation with Member States, keeps under constant review all systems of existing aid.13 That review may prompt the Commission to propose to the Member State concerned the appropriate measures required by the progressive development or by the functioning of the internal market and, if necessary, to decide to abolish or alter aid which it considers to be incompatible with the internal market.14

Article 108(2) TFEU forms the basis for the State aid assessment by the Council, which can take place in exceptional circumstances, as further discussed in section 3.5.1.3.

Article 109

Article 109 TFEU enables the adoption of Council regulations, as further discussed in section 3.4.1.2.

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