6.4.4 Relation between aid intensity and balance sheet reduction

In some studies, an attempt is made to compare State aid cases. For instance, Laprévote & Paron have examined the relation between the aid intensity and the balance sheet reduction.1 The aid intensity is measured by the aid amount divided by the risk-weighted assets (RWA) of the bank. Laprévote & Paron plotted the balance sheet reduction (expressed as a percentage) as compared to the aid amount/RWA-ratio. They found a positive relation between these two parameters – although there were a number of outliers – and concluded that “the extent of the restructuring required depends on the intensity of the State intervention”.2 In other words: the higher the aid intensity, the more restructuring is needed.

More or less the same approach was taken by the Dutch committee of inquiry (“commissie-De Wit”).3 This committee listed the balance sheet reductions of six banks4 and compared these balance sheet reductions with the aid intensity (as measured by the aid/RWA-ratio).

In my opinion, this approach may be a good starting point, but it is far from conclusive. The main problem of this approach is that the extent of restructuring is only measured by the balance sheet reduction. As is apparent from chapter 3, there are many restructuring measures and the balance sheet reduction is only one of them. In the end, it is about the total package of restructuring measures. A low balance sheet reduction can be compensated for by strict behavioural remedies, and vice versa, a far-reaching structural remedy can be compensated for by lenient behavioural commitments.5 In section 6.3, I defined the treatment as the total package of restructuring measures. If one is interested in the treatment in its entirety, then an approach that only focusses on one aspect of the treatment, does not suffice. The approach taken by Laprévote & Paron and the committee-De Wit is therefore too narrow in the sense that it fails to take into account other restructuring measures.6 The balance sheet reduction might be a “rough indicator”, but it is not a sufficient metric for the severity of the restructuring plan.

Similarly, using the aid intensity as a metric for the amount of harm might be intuitively attractive. However, in my opinion, it is not a good metric. While the idea that a higher amount of State aid is more harmful than a lower amount of State aid might be true in many cases, there are situations in which equal amounts of aid (to firms that are of equal size) can result in different amounts of harm. Assume that two firms of exactly the same size receive exactly the same amount of State aid. If one of those two firms is efficient, while the other one is not, then the State aid to the inefficient firm is much more distortive and harmful than the (exact amount of) State aid to the other (efficient) firm. This example illustrates that the aid intensity is not always tantamount to the harm that the State aid causes.

To conclude, while there might be a positive relation between the aid intensity and the need for in-depth restructuring7, this is not a one-to-one relationship. This is also apparent from the Commission’s consideration in one of its Communications: “as a general rule, the more significant the reliance on State aid, the stronger the indication of a need to undergo in-depth restructuring”.8 This phrase might seem to indicate that there is a (one-to-one) relation between the aid intensity and the need for in-depth restructuring, but a thorough reading shows that the Commission uses two caveats in this phrase: “as a general rule” and “indication”. Furthermore, the preceding and succeeding phrases both contain the notion that the specific situation (of each institution) should be taken into account.

In the Commission Staff Working Paper, the Commission stresses that great caution should be applied when making comparisons across bank State aid cases.9 The Commission warns that the amount of aid is nothing more than a proxy of the level of competition distortions. In other words: the amount of aid cannot be equated with the harmfulness of the State aid. This means that comparing the bank State aid cases in terms of their harmfulness is not possible on the (sole) basis of the amount of aid.

Similarly, the Commission observes that “the size of the [balance sheet] reduction might not always reflect the quality of the structural measures undertaken”.10 This means that the severity of the treatment cannot be established by solely looking at the size of the divestments.