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State aid: Commissioner Kroes briefs Economics and Finance Ministers on financial crisis measures

European Commission - MEMO/08/757   02/12/2008

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MEMO/08/757

Brussels, 2nd December 2008

State aid: Commissioner Kroes briefs Economics and Finance Ministers on financial crisis measures

European Commissioner for Competition Neelie Kroes briefed EU Economics and Finance Ministers at their breakfast discussion on the current financial crisis in Brussels on 2nd December. Commissioner Kroes underlined how the Commission had applied the EU competition rules to support financial stability by ensuring legal certainty of support measures whilst preventing national measures from making the crisis worse by exporting problems to other Member States. This is the full text of her intervention:

"It has been over two months since the financial crisis hit our economies in a systemic manner. Many European governments have taken impressive measures to support financial stability, to act decisively in order to restore confidence in the financial markets and to minimize the risk of a serious credit crunch.

"The European solution has included a number of initiatives in the regulatory field. The European solution has also led to substantial State support, combining national State aid measures coordinated through a European State aid framework.

"The role of the Commission in the field of competition policy has been to support financial stability not only by giving legal certainty to the measures taken by Member States in rapid circumstances. It has also been to contribute to maintain a level playing field and to make sure that national measures would not simply export problems to other Member States. The crisis has actually demonstrated that this risk is very tangible, with money flowing to banks benefiting from guarantees and leaving other banks in trouble.

"The Commission has approved a number of schemes supporting financial stability. We have approved

  • guarantee schemes (DK, FI, PT, IRL, NL, SWE, FR, IT)
  • asset purchase schemes (ES)
  • holistic schemes with all of the above (DE, UK, GR)

"We have also approved a number of individual cases such as individual cases of recapitalisation (ING, Parex), guarantees (Fortis and Dexia) and one insurance firm recapitalization (Aegon).

"State aid rules are part of the solution, not part of the problem. The Commission has adopted guidance (on 13 October), which indicates how the Commission intends to apply EC Treaty state aid rules to state support schemes and individual assistance for financial institutions in the current crisis. In 8 weeks, the Commission has adopted more than 20 decisions. We have acted quickly to restore confidence in the market.

"From a focus on rescuing banks, Member States are now increasingly focusing on the risk of a credit crunch. This additional objective is raising a new challenge in terms of how to design recapitalization schemes and is calling for a refinement of the Commission's State aid approach.

"The key question is: why should fundamentally sound banks look for State capital? I understand that we would like to include them in these recapitalization schemes so that they do not de-leverage their balance sheets too much. I also understand that we would like also that they receive State capital at a cost that makes it attractive for them to participate. But I would also plead for caution, so that you make sure that your schemes are properly designed to achieve the objective of lending to the rest of the economy and to avoid distortions of competition.

"The cost of capital is one of the main factors on which banks compete. In order to prevent unfair competition between banks and subsidy races between Member States, we need to preserve the level playing field and co-ordinate the national approaches. We must also ensure that such State recapitalisations do not become a permanent feature of European financial markets.

"The Commission will shortly adopt a communication giving detailed guidance on how to assess such recapitalisations under the State aid rules. The paper reflects extensive consultations with the European Central Bank and Member States. I can assure you that this was not an easy exercise. But I believe we have done our best to accommodate all the comments and suggestions received and that in the end we have a good result.

"In a nutshell, the Communication is based on some broad principles:

  • First, the individual situation of each bank should be taken into account. Some banks may be recapitalised because they are on the verge of insolvency. Some others because they are exposed to distrust in the market. Some banks finally may be recapitalised to support lending to the real economy. Ex-ante differentiation may be possible on the basis of some indicators. But in any case, a viability plan must be notified to the Commission within 6 months, so that the business model of each beneficiary can be checked and those that are in distress engage in some restructuring. The Commission accepts that the pricing formula proposed by the ECB for fundamentally sound banks as a minimum price, which has to be adjusted upwards depending on the risk profile of each beneficiary bank.
  • Second, the schemes must include incentives for the State capital to be redeemed, once market conditions have returned to normality. This is possible through several mechanisms, including a price well above the ECB corridor, a restrictive policy on dividends (I am not insisting on a dividend ban, by the way), call options or increasing remuneration over time
  • Third, behavioural safeguards are needed to limit distortions of competition. If the objective of recapitalisation is lending to the real economy, I would therefore expect commitments to lend from the banks benefiting from State aid. In any case, the State capital should not be there to increase profits or distort competition.

"Let me stress that the Commission is trying to be pragmatic, to be proportionate and to offer Member States flexibility in the exact design of their schemes and in the combination of pricing and other safeguards to attain these objectives. But we also need to make sure that all the schemes broadly fit together and that their main effect will not be to advantage one national banking sector to the detriment of other Member States.

"Our track record so far in this crisis has been honourable and we have already come some way in resolving banks' problems. But we need to do more. It is my goal that the Commission will therefore approve before Christmas a series of additional aid possibilities to deal with the transmission of the financial crisis to the real economy. The new temporary framework to support access to finance in the current financial and economic crisis, include subsidised loans for environmentally friendly products, State aid for risk capital and State guarantees. These measures will complement and enhance the support given to banks. A meeting of experts from Member States is scheduled on the 8/12 and I look forward to your reactions and contributions."


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