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European Commission

Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

Restructuring the banking sector in the EU: A State aid perspective

Conference on State Aid in the Banking Market – Legal and Economic Perspectives - Frankfurt am Main

21 June 2012

I wish to thank the House of Finance policy platform and the Institute for Monetary and Financial Stability of the Goethe University for inviting me to this conference.

Frankfurt is the perfect place for a debate on the banking sector; this city is not only home to the European Central Bank but also one of the continent’s financial hubs.

These days almost everybody is paying attention to the European banking sector. Today the Eurogroup is meeting in Brussels, and finance ministers will discuss – among other important topics – the possibility to advance towards a ‘banking union’.

Next week, it will be the turn of the Heads of State and Government to show their political commitment for the future of the Economic and Monetary Union and to come up with a common strategy to overcome the present difficulties.

Against this backdrop, I would like to share with you my views on Europe’s banks on the basis of the experience gathered by the Commission since the introduction of the special State Aid rules for the financial sector adopted at the start of the crisis.

Upon reflecting on this experience, I would say that the banks that have been involved in some form of public support fall under four categories.

  • The first includes the banks that were affected by the initial stage of the crisis and are now implementing their restructuring plans;

  • The second group comprises financial institutions in Greece, Ireland and Portugal – the so-called programme countries – where the action of public authorities is broader and aims at these countries’ macroeconomic and financial stability;

  • Next, there are the few cases we can regard as unfinished business from the point of view of State aid control; and last but not least

  • I will say a few words on the situation of Spanish banks, ahead of the implementation of the new recapitalisation scheme agreed by the Eurogroup.

The experience so far

But before I elaborate on each one of these groups, let me briefly recall the role of the European competition authority.

Since the beginning of the crisis, an enormous amount of public resources has been allocated to shore up the Europe’s banks. This has taken the form of capital injections, treatment of impaired assets, and state guarantees.

Given the systemic risks associated to this crisis, the Commission found justified the adoption of a set of exceptional State aid rules for the financial sector, which was introduced on a temporary basis in 2008 and 2009.

Under the special crisis regime, we have authorised a number of national schemes; decided on the viability, restructuring or resolution of more than 45 banks; and are still working on over 25 institutions.

Last year, we were prepared to return to a more permanent regime, but the financial markets entered in a new stage of turbulence over the summer and we decided to extend the emergency rules into 2012.

Our main objective when implementing this framework is to return aided banks to long-term viability, which means that they must restructure so that they can conduct their business without the need of more public funds.

If that proves to be impossible, it has been our responsibility to oversee the resolution of the institutions, always performed in an orderly manner and with full regulatory guarantees for depositors.

Our rules have also addressed a host of structural problems that had emerged well before the crisis. So, while we have been handling the individual cases, we have also laid down the conditions for the competitive functioning of the banking industry in the medium term.

To all intents, the Commission has been acting as a de facto crisis-management and resolution authority at EU level. We can be proud of the work we managed to carry out using an instrument that was not designed for that purpose

June 6 Directive and Banking Union

This will soon change. The new EU-wide rules for bank recovery and resolution adopted by the Commission on June 6 offers a more comprehensive solution.

The Directive proposed by my colleague Commissioner Barnier is designed specifically to resolve banks in trouble – including large cross-border institutions – and to protect taxpayers from the impact of future bank failures.

In parallel, the Commission is putting forward the idea of a banking union. This is one of the elements that should pave the way for deeper integration to complement the monetary union architecture.

This political vision recognises that Europe needs a more integrated supervision, common resolution mechanisms and a common deposit guarantee system. It has been welcomed at the G20 summit earlier this week, with G20 leaders expressing support for actions of the euro area in completing the Economic and Monetary Union.

Early cases

This has been our experience so far. Let me now give you a more detailed picture starting with the banks that were first hit by the financial storm.

A number of institutions with large exposures to the wholesale markets and structured products, got in trouble as early as 2007. They included banks such as Northern Rock in the UK, Roskilde Bank in Denmark, and some Landesbanken here in Germany.

Other banks with large subprime exposure were also hit within weeks after the collapse of Lehman Brothers; including ING, KBC, Commerzbank, WestLB, Hypo Real Estate, Dexia and RBS – just to name the biggest cases.

These banks were rescued by their national authorities and their restructuring or resolution plans were reviewed and approved by the Commission.

Large amounts of taxpayers' money were used in these early cases. To this day, the most expensive bail-out in Europe remains that of RBS, with 53 billion pounds in capital injections, and additional aid estimated between 12 and 60 billion pounds to cover for the bank’s impaired assets.

The legacy of the first stage of the crisis are the over 45 banks that, to this day, are selling assets, slashing costs, and refocusing on their core business to return to long-term viability or implementing their orderly resolution plans.

Whenever it was clear that a bank was beyond rescue, it has been our responsibility to oversee its orderly resolution – complete or partial.

Some of the banks that followed this path were relatively small, such as Caja Castilla La Mancha in Spain and Roskilde Bank in Denmark. Others were very big, such as WestLB and Hypo Real Estate in Germany, Anglo Irish in Ireland, and Northern Rock in the UK.

Implementation stage

Although the attention is often focussed on the decision and the negotiations that led up to it, the implementation stage is crucially important.

During restructuring, banks are prevented from undercutting their competitors on the back of the State aid received.

This means that they have restrictions as regards the terms of business they can offer. For example, in some cases they are forbidden to be price leaders for certain products and markets.

They are also forbidden from taking over other banks, since using taxpayers’ money to expand to the detriment of unaided competitors would be highly distortive.

I would like to stress that the implementation of these restructuring plans is largely on track. The divestments are made within the set deadlines and the banks observe the constrains imposed on their business practices.

Moreover, many banks have started paying back the capital support they received from their governments and continue to remunerate the impaired asset measures and liquidity guarantees.

This is crucial not only to achieve a bank capital structure that gives no undue advantage to any institution and to keep a level playing field in the internal market; it also helps to gradually replenish the public coffers of our Member States.

We continue to monitor aided banks in the implementation stage. When certain divestments cannot be made by the set deadlines, we are open to negotiate alternatives.

If national authorities show us that the delay is due to market conditions independent of the bank’s conduct, and the bank proposes alternative ways to achieve the outcomes specified in the restructuring package originally agreed with the Commission, we are open to adjust the original plan.

Of course, the alternatives should have an equivalent effect as the measures that the bank and the Member States would have taken under our original decision.

We have taken a number of amendment decisions, for example in the cases of KBC and Commerzbank.

Programme countries

The second group of banks I will talk about today are institutions located in the programme countries. In this case, our approach takes a wider perspective to encompass the whole sector.

The conditionality for the financial sector under the programme and the conditionality of State aid rules work hand in hand.

For example, in Ireland, one of the objectives of the programme is to re-size the banking sector to match the needs of the country’s economy.

Another goal is to eliminate the funding gaps and increase stable sources of funding in the banks' liquidity mix.

These goals are fully compatible with the State aid regime. To achieve them, we have defined targets for the sector. For example, we have set the loan-to-deposit ratio that the banks are supposed to achieve by a given date.

These targets are then translated into the restructuring plans for individual banks and become part of the discussion of the future business model of the institutions.


The majority of banks in Greece and Ireland has received state support and are undergoing restructuring or resolution, although the two markets need to cope with very different problems.

The main story from Greece, of course, is the outcome of last Sunday’s general election. The vote and the swift formation of a government has brought more clarity to the political landscape and confirmed the country’s place in the euro area. The European institutions will now continue to cooperate with the new government to put Greece’s economy back on track.

This will have a positive impact on the banking sector. There has been a comprehensive review of the strength of each institution and those deemed viable in the long run are eligible for public support using the programme funds.

In contrast, the banks that should not pass the strict viability test would not be able to tap into EU and IMF funds to restore their business. If these banks needed public support, it would be used for their orderly resolution.


In Ireland the programme has provided the funds needed to recapitalise the country’s banks. One of them, the Bank of Ireland, is in the process of implementing its restructuring plan and has successfully raised capital on the market, which I consider a very good sign.

In contrast, more efforts are needed to agree the restructuring of the other pillar of Ireland’s new banking system – Allied Irish Banks. In addition, we are looking at the future of the banking arm of Irish Life and Permanent.

The third big bank –Anglo Irish – is in an orderly winding down process.

In general, I am confident that the restructuring of Ireland’s banks is on the right track and that the sector will eventually be restored to health.


In Portugal, we have recently agreed the terms for the recapitalisation of its banks using public resources received from the programme.

Once recapitalised, thanks to the public support needed to comply with the regulatory requirements, these banks will present their restructuring plans to the European Commission.

As with all like cases, we will assess their business models, their ability to return to viability, the degree of burden sharing, and the measures to limit competition distortion.

Breaking the feedback loop between banks and sovereigns

Programme countries are a telling illustration of the dangerous link between weak banks and the overly indebted governments in the periphery of the euro area.

The impact of this spiral is determined by the size of the support needed by banks and by the state of a country’s finances.

Using taxpayers’ money to rescue banks in distress effectively moves the risk from banks’ books to governments’ accounts.

If the country that takes this decision has healthy public finances and the bailout is limited compared to the size of its economy, the decision will not push up the risk premia investors ask to buy its sovereign debt.

But operations in the programme countries are carried out under a double constraint:

  • on the one hand, the authorities that represent donor countries have a limited availability of funds;

  • on the other, national authorities have a limited capacity to draw on these funds given the impact on public debt.

National and European authorities will have to work together following one guiding principle; the cost of rescuing a bank must be assessed against the costs of its resolution, and the final choice must be made in the interest of the taxpayers at all times.

These decisions are hard but they are also necessary because they can help to break the feedback loop between the sovereign and banks.

Unfinished business

I will now move to the group of cases I called ‘unfinished business’.

In it, we can find banks that have been rescued in the early days of the crisis but whose restructuring plans have not been agreed yet.

Examples of excessively long negotiations include those for Bayerische Landesbank and two Austrian banks; Hypo Alpe Adria and Volksbank – to name a few.

I hope that – thanks to the cooperative attitude of national authorities and the respective entities – we will come up with final decisions in the near future.

A particular case in this category is that of Dexia. The bank agreed a restructuring plan in early 2010 but failed to meet its conditions. Moreover, in 2011 it turned out that the institution could not withstand the impact of the sovereign debt crisis.

A series of factors add to the complexity of this case. First, the bank had three Member States as shareholders; second, the group is in the process of partial resolution, with some parts being sold and others being put into run-off; and third, multiple and linked aid measures are being put in place to secure the process.

We are investigating the conditions of the sale of the Luxembourgish part, BIL; we are also looking into the conditions of the restructuring and nationalisation of the Belgian part – renamed Belfius; and last but not least, we are discussing with France and the other Member States concerned the restructuring plan they have submitted to us for the remainder of the group, including Dexia holding and Dexia Crédit Local in France.


Finally, let me say a few words on Spanish banks. Spain is home to some of the biggest and strongest banks in Europe as well as to a number of medium and small banks – some of them former savings banks – that require public support to cope with the legacy of the housing bubble.

Within the framework of a significant consolidation process, the restructuring of the former savings-banks sector is already underway.

Several institutions have been restructured or resolved with the use of public funds and in line with State aid rules, such as Caja Castilla La Mancha, and Cajasur.

Public authorities have intervened in a number of other banks. These include CAM and Unnim, which have been sold respectively to Banco de Sabadell and BBVA, as well as Caixa Catalunya, Nova Caixa Galicia, and Banco de Valencia, where we are discussing restructuring plans.

Less than two weeks ago, the government declared its intention to apply for European funding in order to complement the recapitalisation process. The Eurogroup has responded to this request by granting a loan up to €100 bn, which covers the total capital needs by a sufficient safety margin.

The details of this program – focussed exclusively on the financial sector – are being finalised, but we know that the policy conditionality of this assistance would focus on horizontal structural reforms of the financial sector, as well as on individual restructuring plans for assisted banks fully in line with State aid rules.

Future prospects and conclusions: What is at stake

Ladies and Gentlemen:

I have given you an overview of the work we have been doing at the EU competition authority with the tools we have at hand and in conjunction with other instruments such as the EFSF.

But more radical and comprehensive solutions are in order. I have already told you of the recent proposal put forward by President Barroso of a banking union.

Advances like this are the sort of political breakthrough Europe urgently needs because, they offer common European answers to problems that have come to affect the whole of the EU, and they will lay solid foundations for the truly integrated Economic and Monetary Union of the future.

The people are already asking when the measures taken to restore financial stability and re-launch growth will bear fruits.

The social costs are already high and sooner or later will become intolerable. The very idea of Europe is being questioned.

The people have always associated Europe with democracy, prosperity, solidarity and civic development. Today, too many citizens in Europe talk mainly about austerity.

We need to reverse this trend. We need to show to the people that – thanks to the necessary adjustments and reforms – Europe can bounce back from a crisis of unprecedented proportion and find sustainable solutions to bring the present uncertainties to an end.

The European Council will soon meet again in Brussels. Recent Summits have generated expectations that were not met by the decisions eventually taken.

I very much hope that this time will be different, because what is at stake is much more than the individual interests and priorities of a small group of citizens or countries. It is the very idea of Europe as our common future.

This calls for leadership, a clear political vision, and firm and precise commitments from all of us.

I am confident that, once again, we Europeans will come together and take bold and far-reaching decisions. And when we do so, no problem will be too large or too complex.

Thank you.

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