1. How can banks strengthen their capital position in line with the current EU rules?
A bank can strengthen its capital position in a number of ways:
a) A bank can raise capital on the market or from other private sources. This falls outside the scope of EU state aid control.
For example, in February 2017, shareholders of the Italian bank UniCredit approved a recapitalisation of €13 billion from private sources.
b) A Member State can intervene in a market-conform manner. This also falls outside the scope of EU state aid control. A state intervention is market-conform if a private economic investor would carry it out on the same terms.
An example of a market-conform intervention in favour of the banking sector is the Hungarian asset management company MARK to which solvent financial institutions in Hungary can, on a voluntary basis, sell non-performing loans at market price.
c) If a bank has capital needs, and it is not possible to fully meet these through private means, a Member State can intervene subject to EU rules, in particular the Bank Resolution and Recovery Directive and EU state aid rules.
2. Why did the Commission consider that the support for CGD is not state aid?
An intervention by a Member State can be considered free of state aid when they are carried out at conditions that a private investor would have accepted (see option b) of Question 1).
In the case of CGD, the bank has always been fully owned by the Portuguese State (see also Question 3). In such circumstances, the Commission needs to assess if Portugal's investment is in line with what a private shareholder would have done in the same circumstances. The EU Treaties are neutral on the type of property ownership. The Commission is therefore bound by the law to give equal treatment to publicly and privately owned banks.
In particular, the Commission assessed three measures by Portugal, which will strengthen CGD's capital by a total of €3.9 billion:
- First, the Commission looked at the internal reorganisation of Portugal's 49% shareholding in Parcaixa and found that it came at no new cost for Portugal. This shareholding in Parcaixa, which was transferred to CGD, increased CGD's core capital by its accounting value of around €0.5 billion.
- Second, the Commission examined the conversion of existing hybrid debt held by Portugal into shares and found that a private debt holder would have accepted it as well, notably because of a sufficient return. This conversion is worth around €0.9 billion.
- Third, the Commission analysed the injection of €2.5 billion of new equity into CGD by Portugal and found that it generates a sufficient return that a private investor would have accepted as well.
In its assessment of the measures, the Commission took into account the planned structural transformation of CGD. Portugal proposed an ambitious industrial plan, running until end-2020, to ensure the bank's long-term profitability and a suitable expected rate of return on Portugal's investment. This plan is accompanied by a strict monitoring mechanism and will be implemented by a credible management team. As part of its industrial plan, CGD will also take actions to further strengthen its capital position from private sources (see option a) of Question 1). In particular, it will raise internal capital and issue €930 million of additional Tier 1 or "core strength" capital to investors not related to the Portuguese State.
Overall, the Commission concluded that CGD could have raised the same capital under the same conditions on financial markets and that Portugal did not give CGD any new state aid.
3. CGD is fully owned by Portugal. Does the Commission treat it differently from private banks?
The EU Treaties are neutral on the type of property ownership. The Commission is therefore bound by the law to give equal treatment to publicly and privately owned banks.
If a privately owned bank wanted to strengthen its capital position, it of course has the option to seek further investment from its private shareholders. Similarly, a publicly owned bank can seek investment from its shareholder, the State. Forcing a state-owned bank to first raise money from the market would mean (at least partial) privatisation and would not ensure equal treatment of public and private ownership.
At the same time, when public authorities directly or indirectly carry out economic transactions in any form, they become an economic operator and are subject to EU State aid rules.
Therefore, such interventions by public authorities can only be considered free of state aid, if they are carried out in line with normal market conditions.
For the reasons explained in Question 2, in the case of the recapitalisation of CGD, the Commission concluded that Portugal acted as a private investor and that it granted no new aid to CGD.
4. Why do we need state aid control for banks?
State aid to banks, as to any other company, can seriously distort competition. When the financial crisis started in 2008, the Commission adopted special rules for the financial sector as state aid should be exceptionally allowed to prevent a systemic collapse of the banking sector and to remedy serious disturbances in the economy.
The EU's state aid rules strike the right balance. They allow Member States to support a bank in difficulty while at the same time ensuring that:
- The use of taxpayers' money is limited through appropriate burden-sharing– this requires the bank, its owners and creditors to contribute to the cost of a bank failure before the taxpayer can be exposed.
- Distortions of competition by aided banks are limited. Giving state aid to a bank distorts competition, as it gives the bank an advantage over banks that do not receive state aid. This needs to be balanced with proportionate remedies, for instance by making sure that the aided banks close or sell parts of their businesses, or by ensuring that they do not use the aid to undercut their competitors.
- Banks undergo the necessary in-depth restructuring to return to long-term viability, so that they can lend to businesses and consumers. If banks can no longer become viable, they are wound down and exit the market in an orderly fashion.
5. What is the role of the Commission?
The European Commission does not supervise banks or take decisions on how to recapitalise banks. This is the role of responsible national governments and/or European or national supervisory authorities. The Commission only has the mandate to verify that plans of state interventions in banks comply with EU rules, in particular the Bank Resolution and Recovery Directive and EU state aid rules.
The Commission applies EU rules in a consistent and equal manner, irrespective of the Member States and the banks involved. In applying EU rules, the Commission's objective is to ensure fair competition between banks in the EU's Single Market.
6. How did EU state aid rules for banks evolve?
The applicable EU rules were updated a number of times, in consultation with all EU Member States and the European Parliament, to adapt to the evolution of the financial crisis and reflect the lessons learnt.
Depending on when Member States choose to address problems of their banks and to come forward with solutions to restore their viability, different rules might apply:
The period between 13 October 2008 and 31 July 2013 - Throughout 2008 and 2009, the Commission adopted a comprehensive framework for state aid to the financial sector during the crisis. This included the 2008 Banking Communication and different Communications with specific guidance on recapitalisations, impaired assets and bank restructuring. They were prolonged in 2010 and 2011. Given the great uncertainty about the banks' problems in the early stages of the financial crisis and the need for quick action, the Commission allowed "rescue aid". This means that state aid could be approved on a temporary basis. Member States had to submit a restructuring plan for banks receiving rescue aid within six months for final approval by the Commission.
From 1 August 2013 - The Commission adopted a new Banking Communication (see Memo, full text here), which is still in force. It replaces the 2008 Banking Communication and supplements the specific guidance on recapitalisations, impaired assets and bank restructuring. In consultation with the Member States, these rules introduced a more effective restructuring process for aided banks and strengthened burden-sharing requirements, asking shareholders and subordinated debtholders to contribute before aid could be granted. As Member States should be able to anticipate the problems of banks better, state aid can no longer be approved on a temporary basis but only on the basis of an agreed restructuring plan and after all private capital-raising measures have been exhausted.
From 1 January 2015 – The Bank Resolution and Recovery Directive entered into force as part of the EU's Banking Union. This Directive introduced the default option for failing banks to go into normal insolvency proceedings. Only if the resolution authority decides that it is in the public interest to do so, can a bank be resolved in line with the Bank Resolution and Recovery Directive. The Bank Resolution and Recovery Directive also required that state aid to failing banks notified to the Commission after 1 January 2015 can only be granted if the bank is put into resolution. The only exception is a so-called "precautionary recapitalisation", allowing state aid outside of resolution in narrowly defined circumstances.
From 1 January 2016 - The bail-in requirements under the Bank Resolution and Recovery Directive entered into force in all Member States that had not already implemented them in 2015. This means that state aid can only be approved subject to a bail-in of at least 8% of the bank's total liabilities (unless approved under the precautionary recapitalisation scenario). This may also require converting senior debt and uncovered deposits.
Under the new rules, the resolution process is managed by a resolution authority -national or the Single Resolution Board for the euro area countries.