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Vice President of the European Commission responsible for Competition Policy
Extension of state aid control crisis regime for banks
Brussels, 1 December 2011
Ladies and gentlemen
The European Commission, today, prolonged, with limited changes, the temporary rules to assess public support for financial institutions during the crisis, with particular emphasis on the conditions and prices for recapitalisation and guarantees for term funding.
I would have liked to end the crisis regime at the end of this year as it has already been in force for three years, since autumn 2008.
Unfortunately the exacerbation of tensions in sovereign debt markets since the summer has put banks in the European Union under renewed pressure.
The conditions for granting aid for the financial sector therefore continue to prevail. I recall the legal basis of the crisis regime which is to remedy a serious disturbance in the economy.
The regime is also needed to help put in place the package agreed by the European Council in October. As you will remember, the package aims to restore confidence in the sector by way of guarantees on medium-term funding, and the creation of a temporary buffer amounting to a capital ratio of 9% of the highest quality capital after accounting for market valuation of sovereign debt exposures.
Of course, banks should ask for government help to meet the 9% capital ratio only as a last resort. They should first and foremost try to raise the money themselves on the markets, including by selling assets which is what some are already doing.
The changes to the crisis regime concern mostly the pricing and conditions for state recapitalisations and for state guarantees.
With regard to the recapitalisations, we do not introduce anything new but rather explain in detail how to ensure that Member States are adequately remunerated. In the future they are likely to recapitalise their banks using ordinary shares, for which the remuneration is not fixed in advance. Therefore, we need to provide guidance to ensure a level playing field for all.
Such shares should be subscribed by the State at an appropriate discount. This principle has already been applied to some cases.
If the recapitalisation takes place through hybrid capital, such as for instance, preference shares, which give right to a fixed remuneration but where a beneficiary bank is unable to satisfy the payment in cash, there should be an "alternative coupon satisfaction mechanism", allowing payment in shares to the State if the bank cannot pay cash.
The Commission has also revised the pricing of guarantees on banks' liabilities, in close consultation with the European Central Bank and the European Banking Authority.
You should know that although the pricing was revised in July 2010 - when we thought the situation in the financial markets was improving - the methodology was largely unchanged since 2008.
The new methodology will reflect the median Credit Default Swaps of the beneficiary banks over a three-year period ending one month before the guarantee is granted. Given the ongoing turmoil in the financial markets, this will provide a fairer and less distorted picture of the risk presented by a bank.
The new fee structure will also reflect the risk of the bank relative to the general risk of the market and the risk of the guarantor country. What does this mean in practice, you may ask? First, it will still ensure that the riskier the bank the higher the fee, which is fair from a competition point of view and also in view of the risk borne by the taxpayers concerned. Second, it will ensure that banks will pay a lower fee for sovereign guarantee which has a lower market value. On average, the level of the fees will not increase, and in many cases will decrease.
I want to stress that the banks which benefit from state guaranteed funding only and are not granted any public recapitalisation or impaired asset measures, do not have to present restructuring plans to the Commission.
This has been our policy since the beginning of the crisis, and it continues to be, in recognition of the difficult funding conditions.
But for all cases where banks get government support in the form of public recapitalisation or impaired asset measures the Commission will continue to require a restructuring plan. This does not mean that the Commission will request a radical restructuring in all cases. We will undertake a proportionate assessment of each plan and no or little restructuring is likely to be imposed if the plan shows that:
(1) a bank is short of capital essentially because of a loss in confidence due to the sovereign debt crisis;
(2) the public capital put into the bank is limited to the amount necessary to offset losses stemming from marking to market sovereign bonds held by banks;
(3) and the analysis shows that the bank in question is otherwise viable and did not take excessive risks in acquiring sovereign debt.
On the other hand, a proportionate assessment also means that we will continue to request fully fledged restructuring from banks which need to fundamentally change their business model.
These are the rules adopted today. We will keep the rules under review and are ready to issue further clarifications and revise the conditions further if market conditions change.
Let me recall, however, that the key condition to disconnect the life-support machine between the State and the financial sector is to solve the sovereign debt crisis. Failure to do so and to do so urgently now, would be a disaster not only for one country or the banks but for the entire EU and the world itself.
Update of aid received
I would like to conclude by updating you on the state support used by banks.
Between 2008 and the end of 2010, Member States used a total of approximately €1.6 trillion, or 13% of GDP, to support financial institutions.
About three quarters of the support (74%) comes in the form of guarantees.
The remainder consists mostly of recapitalisation measures and the treatment of impaired assets.
Nearly 60% of the support was granted by three Member States only: Ireland (25%), the United Kingdom (18%) and Germany (15%).
Regarding the beneficiary banks, 10 account for 50% of the total aid amount (with Royal Bank of Scotland and Hypo Real Estate being in the lead of this particularly unfortunate race).
The vast majority of the banks that we have dealt with so far have had to restructure, change their business model where necessary, bear part of the cost of the restructuring and compensate for the distortions of competition. In some of these cases we are still discussing the restructuring plan. And of course we are monitoring the implementation of those already approved.
Our analysis shows that thanks to our state aid control, the support fulfilled its purpose of protecting financial stability without, so far, causing any irreparable damage to competition and to the single market.
We will continue to apply our state aid control rules, irrespective of whether the support comes from national or, as is possible in the future, EU sources. This is in the interest of the European banking system and of taxpayers themselves.