13.1.1 The need for compensatory measures

As was explained in chapter 2, distortions of competition can occur in several ways. Firstly, State aid gives the beneficiary banks an unfair competitive advantage over other banks which did not get State aid. Secondly, State aid may lead to subsidy races between Member States. Thirdly, if a Member State recapitalises banks which do otherwise not have access to capital (and would subsequently have to leave the market), then State aid can frustrate the normal market functioning. In addition, there is the concern of moral hazard: if banks know or expect that they will be rescued, then they are more inclined to take excessive risks. To compensate for those competition distortions, compensatory measures are needed.

With respect to the need for compensatory measures, it is worthwhile to recall that if a bank is rescued by means of State aid, rival banks usually benefit from this. By contrast, if the fall of a non-financial firm results in its exit from the market, then this is usually beneficial to its competitors. For financial firms – and especially banks – this is different. Since the banking system is highly interconnected, the fall of one bank might trigger the fall of other banks. Furthermore, the fall of one bank might lead to a loss of confidence in the banking sector as a whole. By creating stability on the financial markets, the rescue of a bank is thus beneficial to rival banks.1 In the literature, the question was raised whether compensatory measures in favour of competitors were needed.2

This illustrates that the precise competitive impact of State aid to banks is not crystal clear. Since the need for compensatory measures depends on the (extent and existence of) competition distortions, a thorough analysis to the competition distortions seems warranted. In that regard, it has been remarked that “the Commission has repeatedly refrained from checking whether a distortion of competition was present”.3

At this point, it has to be stressed that the Restructuring Communication gives some valuable guidance as to the compensatory measures. Points 28 to 45 of the Restructuring Communication concern the third pillar of the restructuring plan (i.e. measures to limit distortions of competition). Of particular relevance is point 30, which stresses that the measures to limit the distortions of com-petition should be tailor-made. In that regard, point 30 of the Restructuring Communication stipulates that the nature and form of the compensatory measures depends on two criteria.4 The first criterion is the amount of State aid and the conditions and circumstances under which the State aid was granted. The second criterion concerns the characteristics of the market(s) on which the beneficiary bank operates.

Point 30 of the Restructuring Communication suggests that the competitive impact of the State aid will be assessed by the Commission. Many Commission decisions refer to point 30 of the Restructuring Communication. However, the mere reference to point 30 does not mean that the analysis of the competitive impact of the State aid is actually carried out. Does the Commission assume competition distortions or does it really analyse whether they exist? And on the basis of which characteristics? This will be the focus of the current chapter.5