Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.5.2:3.5.2 The legal basis for the State aid assessment

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.5.2

3.5.2 The legal basis for the State aid assessment

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The 2008 Banking Communication established a new legal basis for the assessment of granting State aid to banks. In the light of the level of seriousness of the crisis in the financial markets, the Commission considered that Article 107(3)(b) TFEU was available as a legal basis for aid measures undertaken to address the systemic crisis. Pursuant to Article 107(3)(b) TFEU aid to “remedy a serious disturbance in the economy of a Member State” may be compatible with the internal market. What this means is further discussed in section 3.5.3.1.

Both in the 2010 Prolongation Communication and the 2011 Prolongation Communication, the Commission considered that the requirements for State aid to be approved under Article 107(3)(b) TFEU continued to be fulfilled in view of the reappearance of stress in financial markets and the risk of wider negative spillover effects. The high volatility of financial markets and the uncertainty about the economic outlook justified maintaining, as a safety net, the possibility for Member States to argue the need to have recourse to crisis-related support measures on the basis of Article 107(3)(b) TFEU.1 In the 2013 Banking Communication, the Commission considered that the requirements for the application of Article 107(3)(b) TFEU continued to be fulfilled, but only for as long as the crisis situation persisted.2 At the time of writing this dissertation, there are no indications that the Commission is going to return to Article 107(3)(c) TFEU as the basis for the assessment of State aid grants in the banking sector.

Article 107(3)(b) TFEU was, until the GFC, rarely used as a basis for allowing aid granted by Member States. An example can be found in the granting of State aid in the context of privatisation of hundreds of Greek firms and public-sector banks as part of a national economic recovery plan.3 In addition, during the recession in the mid-1970s, the Italian government provided temporary aid approved under (the predecessor of) article 107(3)(b) TFEU to small and medium-sized undertakings to offset the effects of a ‘business slowdown’.4 The Commission stressed in its decisions that the exceptions provided for in (the predecessors of) article 107(3) TFEU have to be constructed narrowly when aid schemes or individual aid awards are scrutinised. In particular they may only be invoked when the Commission is satisfied that without the aid, market forces alone would be insufficient to guide recipients towards patterns of behavior that would serve one of the objectives of the said exceptions.

Moreover, in its crisis decisions in relation to IKB and SachsenLB, the Commission pointed out that the GC had stressed that (the predecessor of) article 107(3)(b) TFEU needs to be applied restrictively so that aid cannot benefit only one company or one sector, but that it must tackle a disturbance of the entire economy of a Member State. The Commission consequently argued in these cases that a serious economic disruption is not remedied by an aid that "resolve[s] the problems of a single recipient […], as opposed to the acute problems facing all operators in the industry." The Commission observed that the problems of IKB and SachsenLB were both due to company-specific events. Therefore, the cases seemed rather to be based on individual problems, and thus required tailor made remedies, which could be addressed on the basis of Article 107(3)(c) TFEU and the 2004 R&R Guidelines.5 It was not until the fall of 2008 (when Lehman Brothers collapsed6), that the Commission abandoned its narrow view on the scope of (the predecessor of) Article 107(3)(b) TFEU and decided to use (the predecessor of) Article 107(3)(b) TFEU as a basis for the assessment of the compatibility of aid in the banking sector.7

It is settled case-law that the Commission is not bound by its earlier decisional practice in the application of Article 107(3) TFEU. Legality of a Commission decision declaring that new aid does not fulfil the conditions under which the exemption in Article 107(3) TFEU applies must be assessed solely in the context of that article, and not in the light of the Commission’s earlier decision-making practice, assuming that this is established. Therefore, comparisons with other State-aid proceedings are irrelevant for the purpose of the outcome of the assessment by the Commission.8

The Commission decisions mentioned in this dissertation therefore serve an illustrative purpose.

3.5.2.1 The balancing test under Article 107(3)(b) TFEU

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