Vice President of the European Commission responsible for Competition Policy
Restructuring EU banks: The role of State aid control
CEPS Lunchtime Meeting
Brussels, 24 February 2012
Ladies and Gentlemen:
I wish to thank the Centre for European Policy Studies, and in particular Karel Lannoo, for his kind invitation to this meeting.
Some weeks ago, Karel came to my office for a background conversation about the work that the Commission has been doing since late 2008 to manage the consequences of the financial crisis for Europe’s banks and the way we can prepare the ground for the financial services of the future using the instruments of State aid control.
We thought that it would be interesting to continue our conversation in public, at CEPS. You accepted, and I am thankful for that.
In retrospect, what the Commission – and DG Competition in particular – has done in this field is one of the best contributions we have made to overcome the crisis.
Indeed, the State aid rules for banks in distress that we put in place at the end of 2008, after Lehman, still remain the best instrument in our hands – and in some cases the only one – to manage and coordinate the rescue and restructuring operations of Europe’s banks from an EU perspective.
And now – as we continue to be very busy with that task – we need to deal with the new wave of effects on the banking system of a financial crisis that has turned into a sovereign-debt crisis.
Since the first discussions about how to tackle the Greek problems two years ago, the eye of the storm has moved over Europe, affecting at the same time the banking sector, the fiscal sustainability of many European governments, and credit flows to the real economy.
The situation is complex and calls for a comprehensive approach. Part of the answer lies with EU regulatory changes – where we have advanced a lot with the creation of bodies such as the European Banking Authority and with the proposals to strengthen the financial sector and make it more transparent, such as the Capital Requirements Directive IV and EMIR among others.
Restoring the health of Europe’s banks is an essential step to bring satisfactory and lasting solutions, and this requires both regulatory initiatives and individual tailor-made decisions.
But before talking about the work ahead of us, let me recall some figures to illustrate the size of the public interventions that the near-collapse of the financial system has required so far.
Between 2008 and 2010 – figures for 2011 are still being prepared – EU governments used €1.6 trillion to rescue their banks, equivalent to just over 13% of the GDP of the Union.
Three quarters of this aid was used for guarantees and liquidity measures, which accounted for almost €1.2 trillion of the total. The remaining 400 billion were used for public capital injections and for the treatment of impaired assets.
What have we learned from our oversight of this large rescue effort?
The early days of the crisis confirmed what we had anticipated; the EU lacked common tools to resolve banks with cross-border operations and to coordinate national measures.
But even before the collapse of Lehman Brothers we had to deal with the restructuring or resolution of other banks, such as Northern Rock in the UK, Roskilde Bank in Denmark, and IKB, Sachsen Landesbank and WestLB in Germany.
Immediately after September 2008 – and while we were dealing with the Irish crisis –we saw the rescue and restructuring of more large banks such as Lloyds, RBS, Commerzbank, Hypo Real Estate, Dexia, Fortis, and ING among many others.
The Commission reacted immediately to this dangerous situation using State aid control, which was the instrument the EU had at the ready.
The special State aid rules that were swiftly introduced set out the conditions which every EU country would have to follow to support their banks.
Since then, our emergency regime – giving guidance on the use of State guarantees, the conditions for public capital injections and treatment of impaired assets, and on the restructuring or liquidation of banks – has managed to give a certain degree of uniformity to national responses. And, after over three years, these rules remain the only EU-wide coordination tool that Member States have been able to agree.
In the closing months of 2011, the ECOFIN Council met to strengthen banks’ capitalisation and to solve the acute liquidity problems that Europe’s banking system was experiencing at the time. As it turned out, Member States could not agree any system of state guarantees that would address the difficult situation.
In contrast, EU governments remain comfortable with the conditionality provided by the European Commission’s State aid rules. And because of the continuing financial tensions, I was forced to extend the emergency regime into 2012.
How have the crisis rules been used in practice and what has been their effect?
Since their introduction, we have taken decisions on the restructuring or resolution of 42 banks, and we are in the process of negotiating restructuring terms with 23 more.
The principles that we apply in all cases pursue three main goals:
First, safeguarding financial stability;
Second, preserving the integrity of the internal market; and
Third, restructuring the beneficiaries of aid for long-term viability.
As to the first goal, we can conclude that the rescue package and our control have managed to preserve the stability of our entire financial system.
Our control has also guaranteed that government bailouts would be conducted in the same way across Europe, which helped to preserve the integrity of the internal market.
We can also be satisfied with the work done on the third point – the restructuring or orderly resolution of aid beneficiaries – where the Commission was asked to step in as a de facto crisis-management and resolution authority at EU level.
But over and above these goals, we have always looked into the medium term. And I want to draw your attention to this point. Using the crisis regime of State aid control, we are trying to create the conditions for an open banking sector where banks are no longer a threat to financial stability and provide credit to the real economy at competitive terms.
In particular, our work has addressed some of the structural problems that had been affecting many banks since well before the crisis. In doing this, we are helping banks to become healthier and get ready for the post-crisis financial environment.
Let me tell you in some more detail what we are asking banks to do as a condition for receiving taxpayers’ money.
First, we have had to ask some banks to kick habits that were fairly common in the pre-crisis years: large maturity mismatches between assets and liabilities and an excessive reliance on short-term wholesale funding.
These have always been unhealthy practices; what the crisis did was to reveal them for what they are: unsustainable business models.
For example, a number of German Landesbanken had adopted this model. Many of them – such as LBBW and HSH – have had to restructure and re-focus on their core business. In one case – that of WestLB – the bank was beyond repair and is now in the process of an orderly winding down.
In contrast, when governments have had to pick up the tab for systemically important banks – such as with ING and Commerzbank – we have requested the downsizing and simplification of banking structures.
In every case we look into, we ask the banks to remunerate the support they receive from the governments and to eventually pay it back.
In addition, we are asking banks not to pay dividends and coupons to share the burden with investors. I believe we are the only authority in the world to implement this rule, which addresses the moral-hazard issue and contains public costs.
Finally, we proceed to the orderly liquidation of banks when the cost of their restructuring is too high or their business models too flawed to return to long-term viability.
The latter have been the most difficult cases, such as the WestLB case – which we solved and put on a resolution path. The on-going case of Dexia may be difficult as well; we are about to open complex discussions about its restructuring or winding down, once we receive the proposals from the French and Belgian authorities before the end of March.
As for the other main pending cases, we are engaged in the comprehensive restructuring of the banking sectors in the three ‘programme countries’ – Greece, Ireland and Portugal – with the biggest progress so far in Ireland. We also have unfinished business – among other cases – with some Spanish savings banks and with BayernLB, the last of the German Landesbanks that still has to agree on its restructuring.
Finally, we are busy monitoring the implementation of the 42 decisions taken. Most banks are very committed to implementing them; others struggle to keep their targets – such as the timetable for the divestments.
When faced with objective difficulties and equivalent compensatory measures, we have agreed to certain changes to the divestment schedules. But these remain exceptions, as the restructuring – including divestments – remain indispensable for banks to return to sustainable funding and lending models.
I have come to the end of my presentation.
I would like to leave you with a general comment. Our work with banks in distress has followed – and continues to follow – one beacon; we want to give Europe a leaner, cleaner and healthier banking system.
We can no longer afford zombie banks as we struggle to generate growth and at a time when many EU governments are asking the people to tighten their belts.
I am confident that – in the landscape that will emerge from this crisis – our work is preparing Europe’s banks to stand on their feet and focus on their traditional mission of financing the real economy.
That is really what matters most to millions of European taxpayers, whose efforts are making possible the huge financial support the European banks are receiving since the beginning of the crisis.