The European Commission issued a document concerning to the application of the State aid rules to Government guarantee schemes covering bank debt to be issued after 30 June 2010

Document:

After the onslaught of the global financial crisis in the autumn of 2008, the Commission issued a Communication (the ‘Banking Communication’) which provided detailed guidance on the criteria for the compatibility of government guarantees covering the liabilities of banks, granted either under a national scheme or on an ad hoc basis, with the requirements of Article 107 (3) (b) TFEU. The Banking Communication highlighted the danger of distortive effects of guarantees on competition between banks and specified the temporary nature of the admissibility of such aid measures. Moreover, the Communication stated that such guarantees could only be justified as an emergency response to the unprecedented stress in financial markets and only as long as these exceptional circumstances prevail.

The authorisation was made conditional upon compliance with a number of specific requirements including: a) a limited temporal scope of schemes, implying the need to obtain a
new Commission approval every six months on the basis of a review of a scheme’s continued
justification and the potential for adjustments to the developments in financial market functioning, and b) an adequate remuneration of the government by the beneficiary institutions coming as close as possible to what could be considered a market price.

The Banking Communication, as well as the subsequent guidance documents, established a distinction between fundamentally sound banks whose difficulties stem exclusively from exceptionally adverse general market conditions and other banks for which the crisis revealed
and exacerbated structural weaknesses in their business model, setting out that the latter would have to undergo a further-reaching restructuring.

On the basis of these criteria which were refined over time and complemented by a pricing formula for guarantee fees recommended by the European Central Bank, the Commission has
approved and extended guarantee schemes in 19 Member States and taken a number of decisions on guarantees that were notified individually outside a scheme.

As a result of policy intervention the severe shortage of bank funding that had occurred in autumn 2008 could be overcome relatively quickly. Although market conditions on EU wholesale financial markets have not yet fully normalised, spreads on wholesale bond markets have considerably dropped6 and access to funding is no longer a systematic and generalized problem.

In the second half of 2009, this improvement in conjunction with indicators of stabilization and first signs of recovery in financial markets and in Member States’ economies at large triggered a discussion on the development of a strategy for a gradual disengagement from the temporary exceptional State support measures for banks. The objective of gradual disengagement would be to promote a return to normal market functioning and facilitate a consolidation of public finances, while safeguarding financial stability in what is still a precarious situation in view of the remaining fragility of the recovery process as illustrated by
the current turbulences in relation to sovereign bond markets.

The ECOFIN Council of 2 December 2009 concluded on the necessity to design a strategy for a phasing out of support measures which should be transparent and duly coordinated among Member States to avoid negative spill-over effects but take into account the specific circumstances varying across Member States. The conclusions presented in the present document set out that, in principle, the phasing-out process concerning the various forms of assistance to banks should start with the unwinding of government guarantee schemes incentivising the exit of sound banks and inducing other banks to address their weaknesses.