3.2.3 The justification for State aid to banks

In Chapter 2, the motives for granting State aid were discussed. A distinction was made between the efficiency objective of State aid and the equity objective of State aid. In the case of State aid to banks, the efficiency objective provides the main justification for granting State aid. During the financial crisis, granting State aid to banks was necessary; not just to rescue one bank, but to rescue the entire financial system. This follows from the fact that bank failure is contagious – as was explained in subsection 3.2.2. In addition, as explained in subsection 3.2.1, banks are essential to the economy. For these two reasons, granting State aid to banks may be justified. In that regard, it has been remarked that “the overall public interest is at stake, not just a private one”.1 In other words: the social costs of a bank failure exceed the private costs.2 In economic terms: a bank failure constitutes a negative externality.3 This provides a justification for granting State aid.