State aid to banks (IVOR nr. 109) 2018/13.1.2:13.1.2 The relevant context

State aid to banks (IVOR nr. 109) 2018/13.1.2

13.1.2 The relevant context

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Account should be taken of the relevant context. This PhD-study distinguishes between the C-context, the W-context, the T-context and the S/T/W-context. The defining feature of the C-context is that the beneficiary bank continues to exist as a standalone entity. In the other contexts, the beneficiary bank is taken-over by another bank (T-context), split-up (S-context) or wound-down (W-context). In these contexts, the bank disappears as a standalone entity. This is a highly relevant aspect of these contexts. The Commission decisions in these cases usually start the assessment of the competition distortions with the following consideration:

“The exit of a failed entity which engaged in excessive risk-taking is a clear indication that moral hazard is addressed, in that commercial failure results in liquidation. As a result, the distortion of competition resulting from the State aid is greatly reduced”.1

This recital clearly illustrates that the disappearance of the bank as a standalone entity is relevant from the viewpoint of addressing moral hazard. In addition, the exit of the bank means that the beneficiary bank as such will disappear from the market. As a result, the beneficiary bank as such will no longer distort competition. With respect to the beneficiary bank’s activities, it is possible that some of these activities are transferred to another bank. This is done through an open and transparent tender. In that regard, the Commission usually notes as follows:

“The sale of the Bank, as the beneficiary of the aid, to another market player in the framework of an open sales process constitutes a form of mitigation of potential distortions of competition. This process, which gives potentially harmed competitors the possibility to assume this business, resembles to some extent the “counterfactual” situation that would have occurred in the absence of State aid, as a company in difficulty (or indeed in bankruptcy) will normally often seek a potential buyer in the market or, failing to do so, would be liquidated. As a result, the sale/resolution process in the present case con- tributes significantly to limiting the distortions of competition resulting from the aid”.2

To some extent, the fact that the bank disappears as a standalone entity is a relevant characteristic. This is clearly illustrated by the aforementioned recitals. However, it is not listed as a relevant characteristic, because it is inherent to the context. Indeed, every beneficiary bank in the T-context, W-context or S-context disappears as a standalone entity. By contrast, a bank in the C-context is – by definition – not a bank that disappears as a standalone entity.

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