State aid control in the Banking Union

The role of EU State aid control during the crisis and going forward

Gert-Jan Koopman, Deputy Director General DG Competion, European Commission

Agenda

1. EU State aid control during the crisis

2. The evolution of "Crisis" State aid control

3. State aid control in the Banking Union

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1. EU STATE AID CONTROL DURING THE CRISIS

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EU State aid control: Balancing competition & financial stability in the common interest

  EU Treaty →  State aid to firms subject to the Commission scrutiny to ensure a level playing field in the single market •  Exclusive Commission competence •  Ex-ante assessment (stand-still clause)

  Aid can be allowed when it is in the "common interest" •  Common interest = remedy to a market failure or equity gap •  Financial stability overarching interest rooted in externality of

bank failures (systemic risk)

  Aid has to be necessary, appropriate and proportionate

  →  Commission bound to balance benefits for financial stability with potential distortions of competition

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Coordinating the bank bailouts of the crisis

  Financial crisis (as of autumn 2008) forces Member States to grant support to banks at unprecedented scale

  Crisis management/resolution tools are, if existent, national

  No dedicated mechanism at EU-level to ensure consistent approach to bank rescue - internal market in jeopardy

»  E.g. deposit flows to Ireland following the announcement of blanket guarantee on bank liabilities

»  Risk of uneven level of support, different terms of support

  State aid control as the only EU-level coordination tool for bank rescue and restructuring

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Member States' crisis responses

1 - State-guaranteed funding (vs. freezing of interbank markets)

2 - Recapitalisation by the State (vs. credit crunch, weak capital buffers )

3 - Impaired assets measures (uncertainty about toxic assets)

•  Guarantees of impaired assets •  Purchase of impaired assets

4 - New regulation (resolution laws, deposit guarantees, capital adequacy rules, bank levies etc.)

State aid potentially triggering need for in-depth restructuring

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State aid rules for the financial crisis (1/2)

  Commission guidance on use of bail-out instruments

  On debt guarantees, recapitalisations, impaired asset measures   Overarching principle: Bail-outs should happen at the same terms   Remuneration requirements (established in cooperation with ECB)

key to minimise distortions (moral hazard, crowding out)

  Guidance on restructuring/resolution built on 3 pillars:

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VIABILTIY BURDENSHARING COMPETITION

Return to long term viability, remuneration of capital

Minimisation of cost for the State / the taxpayer

Proportionate remedies, reflecting a) market characteristics

No more public support after restructuring

Mitigation of moral hazard

b) relative/absolute size of the aid

State aid rules for the financial crisis (2/2)

  State aid crisis rules   Are more flexible and more targeted than "normal" rules

–  Possibility existed to inject capital but on predefined terms –  Possibility for Member States to get a scheme authorisation (to grant aid to

several recipients based on one Commission decision) but subject to 6 month evaluation

  Entail procedural innovations –  Temporary approvals of structural measures to cope with urgency, followed by

in-depth analysis / negotiation of restructuring plans –  Speedier Commission internal decision making, enabling the Commission to

provide legal certainty within 2 days from notification

  Are enforced by the Task Force Financial Crisis in DG Competition –  Team of 54 FTEs –  Largely consisting of experts recruited from regulators and industry

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Significance of crisis aid control   So far 67 banks restructured (thereof 23 resolved), 27

cases ongoing; 44 schemes, ~400 decisions

  ~ € 4.9 trillion of aid approved (39% EU GDP), thereof € 1.7 trillion used (13.5% EU GDP)

  Large parts of banking sector under State aid scrutiny

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State aid control promotes "good" restructuring and ensures level playing field

  Restoring viability at the least cost to the public is the overarching objective   State aid should not bail-out investors, but prevent threats to financial

stability and ensure that banks can fulfil their role as lender to the real economy

  Whilst rules have been adapted several times during the crisis, the tested principles have remained in place and all banks have been treated in similar & proportionate manner   Unviable banks were wound-up in each period of the crisis – e.g.

WestLB, AngloIrish, Banco de Valencia, Dexia

  Viable banks were/are restructured: e.g. Commerzbank, ING, Bank of Ireland

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2. THE EVOLUTION OF CRISIS STATE AID CONTROL

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Evolution of State aid control

  Crisis rules have been constantly adapted to changing market circumstances   E.g. Revised pricing of guarantees to cater for sovereign crisis

  Adapted role in programme countries

  Assessment: From micro/bank-level to system-wide approach

  Increasing involvement in the design of restructuring/ resolution plans through ex-ante approval: No (national or ESM) funds disbursed before plans are approved

  Stronger burden-sharing requirements, imposed by EG: Partial bail-in of shareholders and junior creditors

From a coordination to a de-facto resolution mechanism 12

Example: Spanish Programme (1/2)

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CASE STUDY: SPANISH PROGRAMM

  Sector-wide diagnostic under MoU, 8 restructuring plans approved within 3-4 months, prior to disbursement

  Enhanced burden sharing from hybrid capital and subordinated debt holders

  No cash outflow; conversion into equity for all instruments Additional

23% Taxpayers money saved

Example: Spanish Programme (2/2)

Evolving economic, political and regulatory landscape : Main challenges

  Fragmentation of the single market through diverging bail-in requirements (e.g. Spanish and Cypriot programme): different funding costs for banks with similar credit quality

  Distortions of competition between banks across different EU Member States

  SSM/SRM will be established for the Eurozone + only

  Transitional phase until steady-state bank resolution system is operational

  State aid control remains necessary, in pro-active role, with speedier processes

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Main changes of the revised State aid framework (2013 Banking Communication)

  No public recapitalisations or impaired asset measures without approval of a restructuring plan – generalisation of the "ES programme" governance model

  Liquidity support can continue to be temporarily approved in exceptional circumstances

  Approval of public recaps or impaired asset measures requires enhanced burden sharing:   Capital raising measures by the bank, to the maximum extent possible, e.g.

rights issuances, liability management exercises, divestment of subsidiaries, asset and portfolio sales, etc.

  Full contribution by shareholders and junior creditors - all instruments with the capacity to absorb losses should contribute fully to filling the capital shortfall

  Senior creditors and depositors will not be obliged to contribute

  Final shortfall can be covered by public recapitalisation 16

Enhanced burden sharing – potential to reduce capital shortfall (some illustrations)

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3. STATE AID CONTROL IN THE BANKING UNION

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Rationale for a Banking Union

  A vital part of a deep and genuine EMU (Blueprint & Four Presidents report 2012)

  Break the link between sovereigns and banks

  Avoid bail-outs and fragmentation of the single market

  Prevent bank runs, restore confidence, strengthen financial stability and boost economic recovery

Some key elements of the Banking Union

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Single  Rulebook  EU28  

Single Supervisory Mechanism

EU17+

Single Resolution Mechanism

EU17+

Funding Arrangements

(e.g. SRF) EU 17+

EU 17+ / EU-28: RISK OF FRAGMENTATION

Transition to full Banking Union

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Legal  framework  

Single  Resolu3on  Fund  

State  aid  rules  

ESM    

August  2013                                  Autumn  2014    January  2015                2018  and  beyond  

Fund slowly being built up

Revised rules: bank shareholders & junior creditors bailed-in or converted

SRM & BRRD bail-in in two stages: 2015 as per SA rules,

2018 full bail-in SSM

Possible credit line to Fund and possible direct recapitalisation.

Possible  ESM  interven3on  as  per  ESM  guidelines  

SA Rules (possibly revised)

Decreasing likelihood of SA in resolution

BRRD General Approach (subject to negotiations)- main features

 Harmonised resolution toolbox (part of Single Rulebook)

 Envisaged entry into force in 2015 but bail-in only in 2018

 Triggers for resolution   Bank should be failing or likely to fail   State aid (including precautionary recaps) still possible outside resolution

(remains subject to State aid control) - most crisis cases could have fallen outside the scope of BRRD

 Flexibility in the use of bail-in tool (applicable as of 2018)   Bail-in of 8% of eligible liabilities, then 5% bail-out by resolution fund or

other (public) sources   National resolution authorities can exclude certain liabilities from the scope

of bail-in   COM can "veto" such exclusions if resolution fund is used and exclusion

would be inconsistent with BRRD (or implementing acts)  Consequence: More flexibility for Member States as regards bail-in, possibility of aid granted in the context of resolution

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BRRD: State aid as a resolution trigger   Initial Commission proposal based on strict "no bail-out"

principle: need for State aid, except for liquidity guarantees, would trigger resolution (cf. Art 27.2)

  General approach softens this principle, enabling Member States to inject capital in banks that are not "failing or likely to fail

  Pursuant to Art 27.2 BRRD, banks are failing or likely to fail when their capital base is (or soon will be) depleted, they will soon be in negative equity or unable to meet their payment obligations

  This means that a "mechanical" trigger has been changed into a "qualitative" one – triggering resolution subject to discretion of supervisor / resolution authority

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SRM: Contours of the Commission proposal

  Single resolution & decision making system (comprising COM, Board and NRAs)

to be operational in 2014/2015

  Scope: Applies to all banks under SSM

  Clear COM role: decision on trigger, total envelope, "resolution framework": not

only rubber-stamping

  Important role of Board (comprising members of MS, ECB, COM): resolution

planning, recommendation on resolution framework, resolution scheme, assessment,

monitoring, inspections….

  SR Fund based on levies from sector and borrowing; target size 60bn

  Based on BRRD instruments (bail-in as of 2018) and provisions

  Transition: Bail-in in line with SA rules, if MS funding necessary MS have a veto

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Components of the Single Resolution Mechanism

10/10/13 25

Single Resolution

Board

National resolution authorities

x17+

Single Resolution

Fund

European Commission double function as

resolution and State aid control authority

European Central Bank

as bank supervisor

SRM - Interaction with State aid control

  SRM = BRRD resolution authority for the Euro Area

  Need for State aid control in a BRRD /SRM world?   As long as SRM does not cover all banks in the EU, key to ensure that

resolutions happens at the same terms, to protect internal market   Objectives of SA control and resolution largely aligned – preserving

financial stability, minimizing cost of bank failure for the public   Unique resolution/restructuring know-how obtained in close to 100

restructuring cases accross the EU

SA control – important role under SRM regulation 1)  Provisions for information flows to Commission before and during

resolution procedure 2)  Clear references to application of SA rules – SA decision to precede COM

decision on resolution 3)  SA criteria applicable by analogy to interventions of SRF – will ensure

integrity of single market 26

When would SA rules apply to SRM resolutions?

1) Transition period: Resolution requires national and/or intergovernmental funds

Assessment under SA rules (Articles 107 & 108 TFEU), MS concerned must comply with relevant SA rules

2) Steady-state with operational SRF: resolution entails the use of the Single Fund.

Assessment under SA rules by analogy (Article 107(3) TFEU), no need for notification etc.

SRF measures comply with same criteria as those which would have applied, under Article 107(3) TFEU, for intervention of national resolution funds

3) Resolution without recourse to any public resources (no Single Fund; national or ESM funds), e.g. resolution only through bail-in No assessment under SA rules

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