Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.2:3.2 The development of a State aid regime for the banking sector

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.2

3.2 The development of a State aid regime for the banking sector

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The Commission attended the banking sector for the first time in its Eight Report on Competition Policy of 1978. The Commission noticed that Member States exempted the banking sector wholly or partially from the national competition regulatory frameworks by reason of the special regulatory framework that applied in this sector arising out of the constraints imposed by the financial policies of the governments in question. The Commission emphasised in its Eight Report that the competition rules also enclose the banking sector in spite of the special regulatory framework in this sector.1 This was confirmed by the ECJ in its judgment in the Züchner case.2

In the Züchner case, The Bayerische Vereinsbank was sued by a client as a result of a service charge that Bayerische Vereinsbank charged for an international payment from a German bank account to an Italian bank account. Bayerische Vereinsbank argued that the EEC Treaty provisions on competition did not apply, at least to a great extent, to banking undertakings. It maintained that by reason of the special nature of the services provided by these undertakings and the vital role which they play in transfers of capital they must be considered as undertakings “entrusted with the operation of services of general economic interest” within the meaning of Article 90(2) of the EEC Treaty (nowadays Article 106(2) TFEU) and thus were not subject, pursuant to that provision, to the rules on competition in Articles 85 and 86 of the EEC Treaty (nowadays Article 101 and 102 TFEU). The ECJ however ruled otherwise and recognised that the EU competition rules are also applicable to the banking sector.

In the 1980s, the Commission had to deal with the liberalized and deregulated banking sector that formed part of the internal market that was to be realized.3 A strict control by the Commission of the competition rules seemed to be necessary, because of the expected strengthening of competition on this market.4 In its Thirteenth Report on Competition Policy of 1983, the Commission again stressed that the specific characteristics of the banking sector did not exclude this sector from the working of the general competition rules.5 The strict control by the Commission of aid measures was meant to lead to an increase of the economic and social cohesion inside the European Economic Community (EEC) and, besides, to the diminishing of the exorbitant budget deficits of some Member States.6

In 1994, after the formation of the EU in 1993, the Commission intensified its attention on the application of the State aid rules in the banking sector. According to the Commission, this framework should take into account the special characteristics of the banking sector, which could make State intervention necessary in order to avoid bank runs or systemic crises. The Commission clarified that it had no objections against aid that prevented a crisis from starting, that restored faith in the stability of the banking sector or that stimulated the adequate working of the payment system. State intervention could be justified, if a systemic crisis was very likely to occur. But, if just one or several banks were in difficulty, restructuring or liquidation should be the solution.7 In 1994, the first important banking case for the Commission's policy on State aid took place. This case is re ferred to as the Banesto case.8 In this case, the Commission decided that the rescue of Banesto, one of the largest Spanish banks at that time, did not constitute State aid, because the ‘market economy investor principle’ had been fulfilled.9 The Commission also considered that the peculiarities of the banking sector with respect to the other economic sectors required the Commission to carefully verify how to apply the State aid rules to banks.10

After the Banesto case, and prior to the onset of the GFC in 2008, many more cases followed in which the Commission had to decide on the granting of State aid to banks.11 In its decisions, the Commission has often stressed that the State aid regulatory framework applies to the banking sector, while it recognises at the same time that it is necessary, when applying free market laws to the banking sector, to take account of the particular characteristics of the sector and, especially, of the fact that a certain level of protection of depositors and debtors might be necessary in order to avoid more serious consequences, such as the risk of a general crisis.12 In 2008, this risk became reality. As a result of the GFC, the Commission was faced with the challenge to deal with the threat to financial stability, while maintaining strict controls on the granting of State aid.13 It was under these circumstances, that it developed a number of sectoral communications in which it laid down its guidance on the application of the State aid rules in relation to failing banks. But before doing so, the Commission applied the Guidelines on State aid for rescuing and restructuring firms in difficulty that were in effect as of 2004 (the 2004 R&R Guidelines).14

3.2.1 The 2004 R&R Guidelines as a first resort3.2.2 Difficulties in the application of the 2004 R&R Guidelines in banking cases3.2.3 The development of the Crisis Communications

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