Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.4.3.1:3.4.3.1 State aid beneficiaries

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.4.3.1

3.4.3.1 State aid beneficiaries

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The State aid regime for the banking sector does actually not only apply to banks, but also to insurers:

“25. The Commission will apply the principles set out in this Communication and all Crisis Communications to ‘credit institutions’ (also referred to as ‘banks’) (…).

26. The Commission will apply the principles set out in this Communication and all Crisis Communications where appropriate mutatis mutandis to insurance companies within the meaning of Article 6 of Directive 74/239/EEC, Article 4 of Directive 2002/83/EC or Article 1(b) of Directive 98/78/EC.

27. All aid to such institutions incorporated in a Member State, including subsidiaries of such institutions, and having significant activities in a Member State will be examined under this Communication.”1

Two examples of cases in which State aid was granted not to banks, but to insurers and that were assessed on the basis of the Crisis Communications are the cases of the Dutch insurance group of Aegon and the Irish insurer Quinn Insurance Ltd (QIL).

Support for Aegon

The Netherlands provided a loan of EUR 3 billion to the Aegon Association, which was subsequently transferred to Aegon N.V. (Aegon) in exchange for non-voting convertible capital securities. Aegon is the holding company of the Aegon Group, which is a global life insurance and pension group and provider of investment products. The objective of the loan was to strengthen Aegon’s capital base. After the demise of Lehman Brothers, Aegon became subject to a dramatic increase in its credit default swap (CDS) spreads. Aegon incurred EUR 350 million losses from its exposure to Lehman Brothers and Washington Mutual and was forced to revalue its corporate bond portfolio by EUR 2.5 billion. In addition, it was relatively sensitive to stock market dynamics as it had sold insurance contracts that protected the policy holders against stock market losses. On the basis of the 2008 Banking Communication, the Commission considered the loan granted by the Netherlands to constitute State aid that is compatible with the internal market pursuant to Article 87(3)(b) EC Treaty. It temporarily approved the loan as rescue aid for six months on the condition that a viability plan was submitted for Aegon.2 The Commission considered the viability plan that was subsequently submitted by the Netherlands compatible pursuant to Article 107(3)(b) TFEU, since it fulfilled the relevant criteria of the Restructuring Communication.3

Support for QIL

The Irish insurer QIL was put into administration on 30 March 2010 following the establishment of an ongoing breach of the regulatory capital requirements and issues surrounding QIL’s ability to comply with supervisory regulation and the way it was being managed. The administrators applied to the High Court of Ireland for a contribution of EUR 738 million by the Insurance Compensation Fund (ICF) to enable them to restructure QIL by selling its viable activities, continue a limited part of the UK operations until the end of 2012 and immediately discontinue the non-viable product lines. The Commission considered the contribution by the ICF to constitute State aid that is compatible with the internal market pursuant to Article 107(3)(b) TFEU. In order to come to that conclusion, the Commission applied the Impaired Assets Communication and Restructuring Communication.4

The 2013 Banking Communication also applies to the examination of aid to subsidiaries of banks (and insurers) having significant activities in a Member State. It is not specified when a subsidiary has significant activities in a Member State.5

In order for cases to be assessed on the basis of the State aid regime for the banking sector, it is however not necessary that the bank, insurer or subsidiary is the aid beneficiary. This is the entity that has the advantage of, or benefits from, the State aid. There can be multiple aid beneficiaries at the same time.

In the case of the restructuring of Kaupthing Bank Luxembourg, the interbank creditors, the economic activities that were taken over by Blackfish Capital and Kaupthing Bank Luxembourg were considered the beneficiaries of a loan from the Luxembourg State to Kaupthing Bank Luxembourg. The bank’s depositors, the SPV to which commercial loans were transferred, the Belgian branch’s operations and the buyers were not considered aid beneficiaries. 6

Eligibility criteria

Under the 2004 R&R Guidelines rescue and restructuring aid was only available for banks that were ‘in difficulty’. The Commission considered a bank as being in difficulty where it was unable, whether through its own resources or with the funds it was able to obtain from its owners/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, would almost certainly condemn it to going out of business in the short or medium term.7

In the case of Northern Rock, the UK authorities assert the Commission that the bank would fulfil the criteria under domestic law for being the subject of collective insolvency proceedings, if it were not for the measures granted by the Bank of England. The Commission agreed with this statement and considered Northern Rock to qualify as a firm in difficulty.8

The 2013 Banking Communication does not contain a similar criterion. Indeed, during the GFC many banks were supported not because they were in difficulty, but in order to prevent them from further restricting their lending exposure to the real economy.9 The 2013 Banking Communication does however provide that certain State aid measures are only available for banks without a ‘capital shortfall’. A capital shortfall refers to a capital shortfall established in a capital exercise, stress-test, asset quality review or an equivalent exercise at EU, Eurozone or national level, where applicable confirmed by the competent authority (being a national competent authority or the ECB).10 Funding schemes and liquidity support schemes must, for example, be restricted to banks which have no capital shortfall. If a bank with a capital shortfall is in urgent need of liquidity, an individual notification to the Commission is required.11

Regarding the definition of ‘capital shortfall’ in the context of a request for a State guarantee, the ECB understands that this definition encompasses, in line with pre-existing supervisory decisions and practice, the threshold used in the relevant national, Union or SSM-wide stress test or asset quality review which combines own funds requirements under Article 92 CRR with the additional benchmarks established by the competent authority.12

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