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MEMO/09/507

Brussels, 18 th November 2009

State aid: Commission decisions on KBC, ING and Lloyds – frequently asked questions

(see also IP/09/1728 , IP/09/1729 and IP/09/1730 )

What criteria did the Commission use in its assessment of the three banks' restructuring plans?

The Commission's priority is to ensure that banks which have received state aid can operate in the future without such state support, and hence that they have sustainable long-term business models.

The Commission applies the same principles to all banks receiving restructuring aid. These are outlined in the bank restructuring Communication of 22 July 2009 (see IP/09/1180 ). The Commission requires:

  • that the bank will be viable under reasonable stress assumptions without further injections of taxpayers' money in the future;

  • that the bank contributes a significant proportion of the costs of its restructuring via the sale of assets or other means; and

  • that competition distortions created through the aid are sufficiently addressed through relevant reductions of activities.

Why do the restructuring plans aim at creating a new competitor on the UK, Dutch and Belgian markets respectively ?

The Commission's Restructuring Communication outlines that in its assessment, the Commission will examine the structure of the markets on which the banks operate. The three domestic markets in which the banks in question operate are concentrated, with the top five banks accounting for around 80% of each market. The divestments in question will therefore create opportunities for new entrants or an already present smaller player, and will therefore remedy any distortions of competition caused by the state aid.

What effect will the Commission's requirements have on the ability of the banks in question to compete in world markets ?

This ability will be enhanced once the banks in question, as a result of the restructuring plans, have established stable core activiites, solid finances and sound risk management methods.

Will there be sufficient market interest in the divested activities?

The divestments have been proposed by the banks themselves. The indications on the basis of consultations by the Commission are that there is a sufficient degree of market interest in the entities to be divested. The Commission will closely monitor the fulfilment of the relevant obligations.

What is the purpose of price leadership bans?

The price leadership bans ensure that, in line with the restructuring Communication, state aid that has been received cannot be used to offer terms which cannot be matched by competitors which have not received state aid. The specific form of any ban will depend on a case-by-case analysis, and will strike the most appropriate balance between distortions of competition caused by the state aid and the need to maintain competitive market conditions.

It should be recalled that for example in the case of ING where the most far reaching ban is foreseen, the restriction was just one option proposed to the Dutch authorities, which was acceptable to them and above all preferred over other measures.

What is the Commission's position as regards the bancassurance model ?

The Commission does not have a preference for one business model over the other. It will assess, on a case by case basis, whether an adjustment of the business model of the bank in question is necessary .

What effect will the Commission's actions have on taxpayers?

In the long run, better performing stocks are those of companies with sound financial structures, and stable and coherent business profiles. This is why the primary focus of the Commission's actions is on the return to long term viability based on fundamentally sound business models. This will ensure that the burden on taxpayers, who as shareholders have had to fund state intervention in the banks, will be alleviated.

Is reduction of the banks' balance sheets the Commissions main criterion when assessing measures to limit distortions of competition?

The Commission's assessment is based on a multiplicity of criteria and it would be too narrow-minded to only focus on one variable. In general, the Commission looks at two types of distortions of competition: lack of consequences for past errors (moral hazard) and remaining strong presence of the bank. Both effects can be addressed through tailored divestments and/or behavioural commitments.

In all cases, the Commission makes sure that the viability of the bank is given priority, so that divestments and other behavioural measures limit the competitive distortions without endangering long-term viability. For instance, the Commission agreed to preserve the low-cost business model of ING and the bank-insurance model of KBC and considered other divestements to compensate for competition distortions.

Not all banks got into trouble for the same reasons, or have the same market shares in their core markets. Size is not necessarily the decisive factor. For instance, among the recent cases, ING has received the highest amount of aid and has a strong position for current accounts in the Dutch retail market. However, the divestment package agreed with Dutch authorities in the ING case is relatively small in its core market, but is compensated by large divestitures in other key business units such as the entire Insurance business, ING Direct US, Asset Management and Private Banking. Similarly, total divestitures contained in the KBC restructuring plan are less extensive, but are compensated by the high price paid by the bank for the aid and the high quality of the divestment package.

Total amount of divestitures contained in the Lloyds Banking Group's plan is not at the level of ING's either, but is of high quality and constitutes an attractive business proposition for a new entrant on the concentrated UK retail banking market.

What is the Commission’s policy toward paying coupons or calling tier1 and tier 2 instruments. Are the present decisions building on the Commission's established policy in that respect?

The Commission, in MEMO/09/441 of 8 October 2009, recalled the rules concerning Tier 1 and Tier 2 capital transactions for banks subject to a restructuring aid investigation, thereby reminding banks that in a restructuring context, measures which reduce the total amount of own funds are in principle not compatible with the objective of "burden sharing" and the "aid to the minimum necessary" requirement. The Commission further stated that it could accept these transactions on the basis of a case by case assessment, after balancing the above mentioned principles of burden sharing and limiting aid to the minimum against the contribution of the transaction to the refinancing capability and return to viability of the institution.

Such a case by case assessment is now confirmed in the three decisions on Lloyds, KBC and ING:

In the Lloyds case, the Commission received a commitment from the bank not to pay investors any coupon on Tier 1 and Tier 2 instruments or exercise any call option rights in relation to those instruments between 31 January 2010 and 31 January 2012, unless there is a legal obligation to do so. Such restriction also applies to newly issued instruments offered in exchange for existing instruments. There is however a specific exception for certain hybrid instruments to be issued in the context of the global recapitalisation package of Lloyds. This exception is justified due to the presence of a mandatory conversion feature into ordinary shares in case of financial stress, which provides an adequate burden sharing mechanism, while supporting the return to viability of the bank. In case of doubt, the Commission will be consulted.

In the KBC case, the Commission received a commitment from the bank not to pay investors any coupon on Tier 1 and Tier 2 instruments or exercise any call option rights in relation to those instruments, unless there is a legal obligation to do so or the coupon payments can be covered by the current profits of the bank. In case of doubt, the Commission will be consulted. The Commission authorised over the last months certain exchange offers on outstanding hybrid instruments, made at terms that provided an adequate burden sharing for investors, while improving the Tier 1 capital position of the bank and hence supporting the return to viability of the bank.

In the ING case, given that the bank recently launched a €7.5 billion capital increase aimed at repaying more than 50% of the capital injection of the Dutch State (including the accrued interests and exit premium fee), it will not be obliged to defer coupon payments on Tier 1 and Tier 2 instruments. Nevertheless, for the next three years or as long as ING will not have repaid the entire capital injection of the Dutch State (whichever is shorter), the calling of Tier 1 and Tier 2 instruments will have to be authorised by the Commission on a case by case basis. The Commission took note that the bank called a lower Tier 2 bond on 14 October 2009 without prior consultation. This was taken into consideration in the overall appreciation of the restructuring package.


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