3.6.3 Cooperation between Member States

A remarkable example of (the lack of) cooperation between Member States, is the case of Cyprus Popular Bank Public Co Ltd (Laiki). This Cypriot bank had to seek government assistance due to severe losses and deposit outflows. Cyprus was, however, cut off from international capital markets at that time, as a result of which Laiki could not be bailed out by Cyprus. It therefore tried to get assistance from Greece. Laiki had a Greek subsidiary which it had converted into a branch of the Cypriot parent bank. Due to this status as branch, Laiki was however denied access to the ELA of the Greek central bank and recapitalisation mechanisms made available to banks located in Greece. The assistance that Cyprus eventually provided came too late and Laiki had to sell its Greek operations to Piraeus Bank. This formed the reason for Laiki to start arbitral proceedings against Greece under the 1992 bilateral investment treaty between Greece and Cyprus, reportedly alleging unequal treatment in relation to other banks operating in Greece.1 At the time of writing this dissertation, the arbitral proceedings are still pending.

Another case concerns the aid scheme adopted in Ireland at the beginning of the GFC. This aid scheme only guaranteed the debts and deposits of the six largest Irish banks and their subsidiaries abroad; it was not available for banking subsidiaries or branches of foreign banks active in Ireland. This created a cross-border flow of cash from British businesses to the Irish banks covered by the aid scheme which made the British banks active in Ireland more fragile. Following discussions with the Commission, the scope of the aid scheme was broadened to include five foreign banking subsidiaries in Ireland with a significant and broad-based footprint in the domestic economy and foreign branches having a systemic significance. The Commission subsequently accepted that the rules of the aid scheme were not discriminatory in themselves.2

Kaupthing Bank Luxembourg provided private banking services in Luxembourg and through its two branches in Belgium and Switzerland. Luxembourg provided a loan of EUR 320 million to Kaupthing Bank Luxembourg when it became impossible for the bank to refinance itself. Belgium financed half of the loan through an interstate loan to Luxembourg of EUR 160 million. Both Belgium and Luxembourg notified the Commission of the measures taken. Belgium stated that it supported the notification from the Luxembourg authorities. The Commission therefore assumed that the Belgian authorities endorsed all facts and circumstances cited by the Luxembourg authorities in support of their notification and henceforth only referred to Luxembourg. The Commission considered the loan from the Belgian State to the Luxembourg State not to constitute State aid because it was simply a transfer of funds between States. The loan from Luxembourg to Kaupthing Bank Luxembourg was considered State aid.3

In the case of Fortis, the Belgian, Luxembourg and Dutch authorities notified the Commission of the application of three measures to assist Fortis Banque, Fortis Banque Luxembourg and Fortis Bank Nederland: Belgium nationalised Fortis Banque, provided liquidity assistance and financed an investment vehicle to buy impaired assets from Fortis Banque; Luxembourg provided a convertible loan to Fortis Banque Luxembourg; the Netherlands repurchased Fortis Bank Nederland, provided the necessary funding for the repayment of loans granted to Fortis Bank Nederland by Fortis Banque and acquired Fortis Insurance Nederland. Subsequently, 76% of the shares in Fortis Banque and 16% of those in Fortis Banque Luxembourg were sold to BNP Paribas.4 The aid measures were separately assessed by the Commission, but addressed in combined decisions.5

In the case of Dexia, the authorities of Belgium, France and Luxembourg notified the Commission of the aid measures taken in relation to Dexia. These measures consisted of a capital injection by both Belgium and France in Dexia, the parent company of the Dexia group. Luxembourg invested EUR 376 million in Dexia Banque Internationale Luxembourg SA in the form of convertible bonds. In addition, Belgium, France and Luxembourg extended a joint and non-several guarantee to Dexia covering all financing obtained by Dexia and its subsidiaries Dexia Banque Belgique, Dexia Banque Internationale à Luxembourg, and Dexia Crédit Local from credit institutions and institutional depositors, and the bonds and debt instruments issued by Dexia to institutional investors.6

In taking restructuring decisions, the Commission explicitly weighs the risk that divestments of foreign subsidiaries would fragment the internal market. In a number of cases, the Commission requested that banks divested assets in domestic markets instead, with a view toward ensuring competitive market conditions therein.8 In practice, the number of cases in which the Commission obtained from banks the commitment that they divest standalone units on their home markets remained quite limited. The divestitures often concerned foreign subsidiaries or ‘non-core activities’.9 Laprévote and Frisch describe that in the case of Dexia, the restructuring led to discussions between France and Belgium. The two countries were unable to agree on the right formula for splitting the group into a bad bank and a good bank. This reflected the two Member States’ diverging incentives, as Belgium sought to preserve the soundness of one of its largest retail banks and to secure financial stability, while France, where Dexia’s retail banking activities were much more limited, aimed to preserve a key actor in local authority and hospital funding. As a result, the restructuring package eventually approved by the Commission on 26 February 2010 did not foresee the creation of a bad bank.10