Brussels, 24th March 2009
The European Commission has approved, under EC Treaty state aid rules, a UK scheme to encourage banks to provide new lending to businesses in the UK (the Working Capital Guarantee Scheme). In the context of the current global financial crisis banks have become increasingly risk averse and are reducing credit ceilings. Under the scheme, the UK will offer banks up to £10 billion of guarantees in respect of portfolios of working capital loans to sound, credit-worthy companies. By virtue of this government guarantee, banks will obtain capital relief, which the banks have to redeploy to support further lending to businesses. The guarantees will be priced at a level designed to make the scheme self-financing. The Commission found that the measure is an appropriate, necessary and proportionate means of remedying a serious disturbance in the UK economy. In particular it is non-discriminatory, limited in time (two years) and scope and requires a risk-based remuneration. It is, therefore, compatible with the rules on state aid to remedy a serious disturbance in a Member State's economy (Article 87(3)(b) of the EC Treaty), as explained in the Communication on how these rules apply to banks during the current crisis (see IP/08/1495).
Competition Commissioner Neelie Kroes said: "The UK working capital guarantee scheme should provide an effective means to support lending to the UK real economy in the current economic and financial crisis. I appreciate the design of the scheme to make it self-financing and thus to reduce any potential aid to the minimum and limit distortions of competition. I also welcome the non-discriminatory character of the scheme as regards the sector and nationality of the borrower".
On 25 February 2009 the UK authorities notified a guarantee scheme to support the provision of working capital loans to businesses operating in the UK market, including subsidiaries of foreign firms. The UK Government will provide a guarantee of up to 50% in respect of portfolios of working capital loans to sound, credit-worthy companies with an annual turnover of up to £500 million. The UK Government is making these guarantees available to participating banks providing that the capital which is released by the government guarantee will be redeployed to support new loans to businesses. The scheme has a budget of £10 billion and its duration is limited to two years.
Only good quality assets are being guaranteed. So-called "impaired assets" are therefore excluded. The scheme is expected to be self-financing and the fees payable by the banks will be set at a level sufficient to absorb some deterioration in the expected loss. The banks have, in turn, to provide new lending to SMEs or mid-sized companies having economic activities in the UK. The UK will regularly monitor the participating banks' performance in redeploying the capital.
The Commission considered that the scheme potentially provides an advantage to the participating banks. The government guarantees will be provided below market price. The scheme therefore had to be assessed under the EC Treaty state aid rules.
The Commission concluded that the guarantee scheme is an appropriate, necessary and proportionate means of supporting lending to the real economy. The scheme is well targeted and designed in such a way as to minimise negative effects on competitors, other sectors and other Member States. The Commission in particular views positively the risk-based level of the guarantee fees, which will make the scheme very likely to be self-financing. Moreover, the Commission also took specific account of the non-discriminatory character of the scheme: the scheme is open to all major UK banks with substantial exposure to the business sector in the UK and, as regards new lending, it is open to all businesses operating in the UK market that are SMEs or mid-sized companies. In addition, the scheme is limited in its size and duration (2 years).
The non-confidential version of the decision will be made available under the case number N 111/20089 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.