Introduction
The European Commission published in February 2015 a brief summarising the key financial data concerning State aid awarded by Member States to their financial institutions during the outbreak of the economic and financial crisis1.
The figures are fairly impressive. It is estimated that between 2007 and 2014 a total of 22 Member States provided € 671 billion in capital and loans and € 1,288 billion in guarantees in favour of their respective credit institutions. In this period the Commission issued more than 450 restructuring or resolution decisions concerning 112 banks with EU presence – roughly 30% of the entire European banking system. In a few countries, such as Portugal, more than 50% of the national financial system received State support. Among the 112 aided banks, 56 were restructured, 33 were wound down in an orderly manner, 14 were deemed viable without further need of restructuring, and 9 were still pending a decision on their restructuring plans as of December 2014.
The Commission takes the view that the measures adopted as a reaction to the crisis are showing positive results which translate into an improvement in risk, solvency and liquidity ratios, which are also confirmed by the recent stress tests undertaken by the ECB. However, the Commission also acknowledges that restructuring plans require a degree of phasing-in and thus the math should only be done at the end of such adjustment programmes.
The two moments of the crisis
The Commission’s approach in State aid matters towards ailing banks has evolved.
With the purpose of addressing the systemic economic and financial crisis that the EU faced from 2007 onwards by means of a coordinated action, the Commission provided guidance in support of the financial sector spelling out the conditions for access to State aid. It did so by adjusting the existing legal framework to the new reality.
In the first stage – that may be set between 2008 and 2012 – financial stability was the overarching objective that drove the need to set up soft law instruments in order to put banks in distress on more solid footing in the long run, if necessary, through public resources. During this period, countries were encouraged with the Commission’s backing to deploy large amounts of State aid so as to ensure adequate levels of solvency and liquidity in their credit institutions and prevent spill-over effects for the remaining financial market.
This model set the path to the recapitalisation scheme for credit institutions in Portugal enacted by Law No. 63-A/2008, 24 November.
After this first stage, where the use of public investment tools allowed Member States to ensure comfortable levels of resilience in their banking industry, in 2013 the European Commission deeply revised access rules to public resources by ailing credit institutions.
Whilst in first moment actions put in place to deal with the crisis aimed essentially at easing concerns brought by the turmoil in the financial markets and the crisis of sovereign debts, from 2013 onwards the Commission considered that the financial sector faced further challenges stemming from fragile and uneven economic recovery processes and public and private deleveraging with repercussions in terms of banking assets quality and accessing term funding.
In view of the Member States’ need to reduce and consolidate public and private debt, the Commission significantly strengthened in 2013 the minimum requirements in terms of the burden sharing of restructuring costs on the part of supported institutions, their shareholders, and subordinated creditors.
In practice, this means that after 2013, and as a general rule, Member States, prior to conceding aid to a bank in distress (either in the form of capital or impaired asset measures), should preferably exhaust all alternative measures to generate funds for the target institution and ensure that capital holders and holders of subordinated debt contribute as much as possible with their own resources.
Hence, the Commission now deems, as a general principle, that there is less need for structural measures granted on the basis of a preliminary assessment of a bank’s financial situation. Conversely, it now favours an anticipation of the in-depth discussion and the approval of banks’ restructuring plans and the remedies attached thereto to a moment preceding the award of State aid.
The Commission’s main conclusions
The assessment made in the Commission’s brief is only based on the results of the State aid policy concerning banks that were considered viable, thus excluding banks that were orderly wound down and that represent a significant share (c. 30%) of the aided banks during the crisis.
To this end, a bank’s viability is roughly assessed as the possibility to return to sustainable profitability within a 5-year time frame without further support from the State. This concept of viability also presumes that during the restructuring period burden sharing measures are put in place by the aid recipient, its shareholders and subordinated creditors, together with commitments able to limit competition distortions flowing from the aid (that may be structural, behavioural or both).
In this balance exercise the Commission sought to assess the performance of supported banks before and after the award of the aid vis-à-vis that of the competitors that did not benefit from aid, taking account of key financial indicators relating to developments in operative and risk management, overall profitability, capital ratios, and funding positions. It follows from this comparison that there is a confluence between supported banks in the post-aid period and the levels achieved by unaided peers. This trend towards an increasing approximation becomes more visible as restructuring plans are implemented through time.
See the graphs for this article in Newsletter no. 21.
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