7.4.1 Application of the MEOP in bank State aid cases

In its assessment of whether the Member State acted as a market economy operator when it rescued a bank, the Commission took into account the following relevant characteristics of the case:

With respect to recapitalisation measures, the Commission held that a market economy investor expects a reasonable return on his investment and that if a firm is in difficulty, it is normally not justified to assume a reasonable return.1 When a State recapitalises a bank, it does not act as a private investor, if a private investor would not be willing to inject capital at all or not at such a low level of remuneration.2 If there is no prospect of profit, a market economy investor would not be willing to enter in such a transaction.3

With respect to a transfer of impaired assets to an Asset Management Company, the Commission noted in several decisions that the transfer value of the portfolio was (equal to the real economic value and) higher than the market value. This led to the conclusion that the transaction could not be considered to be in line with the Market Economic Operator Principle.4 Indeed, a market economy investor would not be willing to purchase assets at a price above market value.

Interestingly, in two recent cases, the Commission considered that the impaired asset measures did not constitute State aid. On 10 February 2016, the Commission adopted a decision on the Italian securitisation scheme (Garanzia sulla Cartolarizzazione delle Sofferenze – “GACS”) and a decision on the Hungarian Asset Management Company (Magyar Reorganiz á ciós é s Követel é skezele Zrt – “MARK”).5

Under the Italian scheme6, each participating bank would set up a securitisation structure: an individually managed, private securitisation vehicle would buy NPL’s from the bank and pool them. The funding necessary to buy these NPL’s is raised through issuing senior and junior notes to private investors. The senior notes would benefit from a State guarantee (which will only become active after the originating bank has sold to private investors at least 50% plus one share of the junior tranche).

The Commission noted positively that the risk for the Italian State is limited, as only the guarantee only applies to the senior tranche. In addition, the guarantee fee will be based on a market benchmark (a basket of CDS prices of Italian- based companies) and correspond to the level and duration of the risk the State takes granting the guarantee. Taking risk and remuneration together, the Commission concludes that the scheme is at market terms. The MEIP is therefore met and, accordingly, the guarantee does not constitute State aid.

The Commission has been criticised for being too lenient in these two cases.7 Italy was very keen on avoiding the impaired asset measures being classified as State aid, because such a classification would trigger resolution and the application of the bail-in tool.8 In that regard, it should be noted that many shareholders of Italian banks are families and small investors rather than professional investors.

In many cases, the State intervention was driven by the desire to avoid a further deterioration in the financial position of the bank, which would represent a threat to the stability of the financial system.9 The State is obviously concerned about maintaining financial stability, whereas a private investor is only concerned by a reasonable return on his investment. In that regard, the Commission recalled that “public, economic and social policy considerations must be disregarded in the assessment of the principle of the private investor in a market economy”.10

This point was also illustrated in the case of the Greek T Bank. In this case, the argument was raised that the aid amount would be lower than what the HDIGF/the State already paid and might still have to pay if T Bank had been let to go bankrupt. The Commission held that it was not a valid comparison: “any such payment by the HDIGF or by the State to indemnify depositors would not be made as a market operator but would be made as a public authority”.11

The fact that the Member State notified the measure as State aid contributes to the conclusion that the Member State did not act in line with the MEOP.12

The fact that there is a private investor participating in the same investment on the same terms as the State is a relevant characteristic. This is illustrated by the case of Dexia. The split-up of Dexia (October 2011) comprised the sale of Dexia Banque Internationale à Luxembourg (Dexia BIL) to a Qatari investment group (Precision Capital SA) and the Luxembourgish State. Precision Capital acquired 90% of Dexia BIL, the other 10% was acquired by the Luxembourgish State. Since Luxembourg was participating on the same conditions as Precision Capital, the Commission considered that Luxembourg was acting as a private investor.13

However, the concomitant provision of capital from private investors does not always lead to the conclusion that the state is acting as a market economy investor. This is because the investment decisions of the private investors are sometimes – especially if market conditions are bad – likely to be influenced by the very fact that the State is investing alongside them. Therefore, the provision of capital from private investors may be concomitant but not necessarily ‘pari passu’.14

In a similar vein, the Commission noted in its Opening Decision on LBBW that (according to the statement of Germany) many of the owners of LBBW would not have provided the capital injection without the guarantee measure from the Land Baden-Württemberg.15

In fact, there are several cases in which the State did not act in line with the MEOP, even though private investors were participating in the State intervention. In that regard, the Commission recalled that the “public intervention must not only be made in parallel with other private interventions, but the interventions needs to be proportionate to each party’s interests, and must be provided under the same conditions and industrial rationale”.16

Many banks received State aid not only once, but several times. This can have an impact on the MEOP, because the aid measure must be seen in the context of earlier State aid granted to the bank.17 Sometimes, it is not possible to view an aid measure separately from prior aid measures to the beneficiary bank.

This can be illustrated by the case of Lloyds Banking Group (“LBG”). LBG received a capital injection (of £ 14.7 billion) in January and June 2009. After-wards, in the context of the so-called Seaview project, LBG undertook a rights issue of £13.5 billion, in which the shares were offered to the existing shareholders at a deep discount to the stock market price. As a result of the capital injections in January and June 2009, the UK State had acquired a 43,5% stake in LBG. To maintain its 43,5% stake, the UK government participated in the Seaview project and subscribed to 43,5% of the newly issued shares.

With respect to the State participation in the Seaview project, the UK authorities and LBG argued that a private investor would have participated in the share offer in similar circumstances since the shares were offered to the existing shareholders at a deep discount to the stock market price. Not participating would mean foregoing the possibility to purchase these shares at a discounted price.18

The Commission did not accept these arguments. The Commission noted that the State’s participation in the Seaview project followed other aid measures granted to LBG (i.e. the £ 14.7 billion recapitalisation in January and June 2009).

The State participation in the Seaview project could not be considered as free of aid, because the opportunity to buy shares at a deep discount price exclusively resulted from an aid measure granted in the prior months, i.e. the £ 14.7 billion recapitalisation. A private investor would not find itself in the situation of the State since it would not have granted the £ 14.7 billion recapitalisation. The Commission therefore concluded that the State participation in the Seaview project did fulfil the market economy operator principle.19

In some instances, the actual conduct of private investors is taken into account by the Commission in its application of the MEOP. This is illustrated by the case of SNS REAAL. When SNS REAAL experienced financial difficulties, first a private sector solution was sought. This private sector solution proved, however, not to be possible and the Dutch State had to intervene and rescue SNS REAAL.20 In its assessment of whether the Dutch State was acting as a market economy investor, the Commission took into account the fact that the private sector solution failed, because this fact made clear that private investors did not want to rescue SNS REAAL on similar terms to those accepted by the Dutch State.21

Similarly, in the decision on Anglo Irish Bank, the Commission referred to the fact that the Irish State was only investing because no market economy operator was willing to invest on similar terms.22

Footnote 2 to point 15 of the IAC provides that a guarantee (with respect to impaired assets) is presumed to constitute State aid when the beneficiary bank cannot find any independent private operator on the market willing to provide a similar guarantee.

To conclude, the fact that private investors are unwilling to invest in the bank, is a relevant characteristic (and taken into account in several decisions23).

In some decisions, the Commission did not only refer to the unwillingness of private investors to support the bank, but also to the ability of private investors to rescue the bank. For instance, in its decision on Fortis, the Commission considered that “for the purposes of applying the principle of the market economy investor, the conduct of the State must be compared with that of private investors in the situation prevailing at the precise moment that the transaction was effected– that is to say investors who were greatly constrained in their financing by the almost complete drying-up of the interbank market – and not the situation of the State, which, as a public authority, experienced no great difficulty in raising finance”.24

By the same token, the Commission noted in its decision on Royal Bank of Scotland (RBS) that “in the current state of financial markets, no market operator would be able to guarantee the size proposed”.25 Also in the decision on Anglo/ INBS, the Commission considered that “it would not be possible for a market operator to obtain such financing”.26