8.3.2 Appropriateness of a recapitalisation

The Commission has held in many decisions that a recapitalisation “is in principle an appropriate means to strengthen the financial institutions and thus to restore market confidence”.1 As the Commission put it, the objective of the recapitalisation scheme is “to ensure that banks are sufficiently strongly capitalised so as to better withstand potential losses”.2

The reasoning of the Commission can thus be summarised in a few sentences. In fact, in many decisions, the assessment of the appropriateness of a recapitalisation measure only takes a few sentences. However, there are also decisions in which some additional aspects can be found. These aspects mainly relate to the capital requirements and the objectives of the recapitalisation (scheme).

An important aspect of the assessment of the appropriateness of a recapitalisation concerns the applicable capital requirements. In some instances, the need for a recapitalisation is caused by an increase of the capital requirements. For instance, on 18 February 2011, Spain introduced more stringent regulatory capital requirements for its banking sector. Pursuant to this new legislation, all banks operating in Spain had to meet a 10% capital principal solvency ratio over risk weighted assets by 30 September 2011 at the latest. 3As a result of this new legislation, several Spanish banks required additional capital in order to meet the higher solvency levels.4

In its decision of 11 February 2013 on the prolongation of the Polish bank recapitalisation scheme, the Commission observed that the applicable prudential requirements had been significantly increased by the European regulators. This led to concerns about the creditworthiness of certain banks.5 The Commission therefore concluded that a backstop mechanism by the Member State was an appropriate means to strengthen financial institutions and thus to restore market confidence.6

It should be pointed out that recapitalisation measures are not only taken with respect to banks that experience a capital shortfall; also banks that comply with the regulatory capital requirements are sometimes the beneficiary of a capital injection. The need for a capital injection is sometimes caused by rising international capital market expectations in relation to capital levels for financial institutions. In one of the decisions on Anglo Irish Bank, the Commission explicitly recognised that these expectations can make it necessary also for banks that meet the regulatory solvency ratios, to further strengthen their capital ratios.7

Another aspect concerns the objectives of a recapitalisation. In the first place, a recapitalisation (scheme) is meant to provide banks with sufficient capital, so that they are able to withstand potential losses. Another objective of a recapitalisation is to ensure that banks provide sufficient lending to the real economy; to avoid a credit crunch. The Commission attaches great importance to this latter objective.8

Most bank support schemes include a requirement for the beneficiary banks to continue lending to the real economy.9 For instance, the objective of the Danish recapitalisation scheme was “to stimulate the supply of credit to viable and healthy undertakings and households by increasing the capital and the solvency of credit institutions in Denmark and thus enhancing their possibility to offer finance to the real economy”.10

With respect to the requirement to continue lending to the real economy, three remarks are in order. Firstly, what is the added value of this requirement? Does the requirement to continue lending to the real economy change the behaviour of banks? Or would they also have continued lending without the obligation to do so (in exchange for State aid)?

Secondly, the requirement to continue lending to the real economy is a useful way to avoid a credit crunch to the real economy. It should, however, be kept in mind that excessive lending is not beneficial to society.11

Thirdly, the beneficiary bank is usually required to reduce its activities (“downsizing”). There is some tension between the requirement to continue lending to the real economy and the downsizing-requirement.12