10.5.3 External or internal factors?

In several decisions, the Commission dwelled on the cause of the bank’s difficulties. This can be illustrated by the case of the Bulgarian First Investment Bank (FIB), which was granted liquidity support in 2014. FIB experienced a sharp liquidity outflow. The outflow of deposits was caused by the general liquidity crisis of June 2014 that endangered the entire Bulgarian banking sector. This aspect was taken into account by the Commission who stressed that the liquidity support to FIB was due to external factors (and not to structural problems of the bank itself).1 In addition, the Commission noted that FIB did not face any capital shortfall.2 For these two reasons, the Commission considered that lighter restructuring was required (compared to what the Commission would seek when confronted with a bank receiving State aid to cover a capital shortfall).3 This case illustrates that that if the bank’s difficulties are mainly due to external factors, then there should be less need for far-reaching restructuring than when the difficulties are due to internal factors.

Furthermore, the case of FIB illustrates that also outside the context of the proportionate assessment, the Commission takes into account the macro- economic situation in the Member State. Another example is the case of Bank of Ireland. When assessing the measures to limit the distortion of competition, the Commission took into account the particular situation on the Irish financial markets.4 This particular situation consisted of “a deep recession combined with a dramatic fall in property prices, high unemployment and foreign competitors that are retrenching”.5 The Commission held that, because of this particular situation on the Irish financial markets, a careful assessment of the market conditions and competitive environment was necessary.

It should be noted that an unfavourable macro-economic situation in the Member State cannot be used easily as an excuse for the bank’s difficulties. In the decision on the Irish bank PTSB, the Commission first noted that all Irish banks were affected by the financial crisis. The Commission went on to consider that PTSB had specific weaknesses which exacerbated its situation.6 Those specific weaknesses consisted of a “significant funding gap way above industry norms” and an “exposure to the Irish and UK residential property market, combined with loss-making tracker mortgages and lower credit standards”.7 Similarly, in its decision on CCB/CCI, the Commission observed that “the economic recession was an external factor worsening an existing internal problem”.8

One of the most prominent internal factors is the fact that the beneficiary bank has taken excessive risks.9 This characteristic is important in the context of moral hazard. Moral hazard is problematic because (the expectation of) State aid induces banks to take excessive risks. If banks that have engaged in overly risky behaviour are rescued by the State, then compensatory measures are needed to address moral hazard. The problem of moral hazard is created by the fact that banks do not bear the downside consequences of their behaviour. As a result of the compensatory measures which are (to some extent) aimed at inflicting “pain” on the bank, the bank is forced to bear the consequences of its behaviour. This way, moral hazard is addressed. Conversely, if the beneficiary bank did not take excessive risks in the past, then there is less need to “punish” the bank.

To give an example: in its decision on ABN AMRO, the Commission stressed that the business models of Fortis Bank Nederland (FBN) and ABN AMRO N10 did not rely on excessive risk-taking and unsustainable lending practices.11 Hence the need for burden-sharing and compensatory measures was reduced:

It should be noted that there are decisions in which the fact that the bank has engaged in excessive risk-taking is not mentioned in relation to the need for far-reaching restructuring in general, but in relation to a specific restructuring measure. For instance, the fact that the bank has engaged in excessive risk- taking can be a reason to replace the senior management of the bank, it can be a reason to improve the risk management of the bank, it can be a reason to improve the corporate governance framework of the bank, or it can be a reason to improve the remuneration policy of the bank (so that it does not encourage excessive risk-taking).13

In addition, there are many decisions in which these restructuring measures are mentioned without reference to the cause of the bank’s problems. For instance, in the decision on Banco Comercial Português (BCP), the Commission observed that BCP had undertaken “a significant overhaul of strategy to strengthen its corporate governance management, most notably on risk management practices and controls”.14 Although this decision mentions the fact that the beneficiary bank has committed to improve its corporate governance and risk management, the decision does not mention whether the bank had internal problems that necessitated these restructuring measures. The decision on BCP is just an illustration of the many decisions in which the issue of whether the bank’s problems are due to internal factors is not explicitly taken into account. This can be explained by the more general observation that the Commission did not explicitly assess in every bank State aid case whether far-reaching restructuring was needed.