Overview of main changes Conclusion and outlook
New rules on State aid to banks The European Commission has adopted a new Communication on the application of EU State aid rules to support measures in favour of banks in the context of the financial crisis (the Banking Communication).
Overview of the main changes State aid must not be granted before equity, hybrid capital and subordinated debt have fully contributed to offset any losses. Banking Communication, paragraph 44
The new Banking Communication contains the updated rules for crisis-related aid to the financial sector and will be applied as of 1 August 2013. It replaces the 2008 Banking Communication and supplements the other communications for the financial sector (Crisis Communications). Together, the Crisis Communications form the framework for the support of the financial sector by the Member States, eg through the provision of guarantees, recapitalisations or impaired asset relief measures. The new rules also apply mutatis mutandis to insurance companies. The Commission hopes that the new rules will enable a more efficient restructuring of banks and the minimisation of State aid through a wider participation of third parties in the support. In addition, the rules are intended to prepare a smooth transition to a Banking Union by providing more clarity to markets. To achieve these objectives, the Commission has further tightened its rules vis-à-vis beneficiary banks and third parties, and limited the ability of Member States to grant aid in the financial sector.
Support only after identification of a capital shortfall From 1 August 2013, recapitalisations and impaired asset measures (including guarantees on the asset side) will only be authorised if the Member State concerned has demonstrated a capital shortfall of the relevant institution which the bank and its shareholders cannot further minimise on their own. Member States have to explain this in a capital raising plan, to be presented before the restructuring plan (or, at the latest, as part of it). The capital raising plan must demonstrate the capital shortfall as a result of a (European or national) official procedure (eg a stress test) and set out all capital raising measures of the bank (eg voluntary conversion of subordinated debt instruments into equity, liability management exercises, sales or securitisation of assets and portfolios and earnings retention). In addition, the Banking Communication contains measures to strengthen the accountability of banks' management: generally the Chief Executive Officer and, if appropriate, other board members, should expect to be replaced if recourse to State aid could reasonably have been averted through appropriate and timely management action. Stricter remuneration rules should create further incentives to ensure sustainable corporate management. Thus, the total remuneration to each member of staff (including board members and senior management) shall not exceed 15 times the national average salary in the Member State where the beneficiary is incorporated (according to OECD information) or 10 times the average salary of employees in the beneficiary bank. Andreas von Bonin T + 32 2 504 7641 E
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New rules on State aid to banks July 2013
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More burden-sharing In the future, adequate burden-sharing will entail greater contributions from shareholders, hybrid capital holders and subordinated creditors. The latter must contribute to reducing the capital shortfall by converting their debt into Common Equity Tier 1 or by writing down the principal of their instruments. The Commission will not, however, require a contribution of senior debt holders (in particular, holders of deposits and bonds) ‘as a mandatory component of burden-sharing’. The tightening of the burden-sharing rules serves to minimise aid, but falls short of a general ‘bail-in’ by depositors (such as took place in Cyprus). Two scenarios need to be distinguished: • capital ratio remains above the regulatory minimum despite the capital shortfall: In general, capital shortfall needs to be overcome by funding activities of the bank. If necessary, subordinated debt must be converted into equity, before State aid can be granted; and • minimum regulatory capital requirements are not met: Subordinated debt must have fully contributed to offset losses, before State aid can be granted. In addition to the well-known acquisition, dividend and advertising bans, affected institutions must also refrain from business operations with a negative impact on the equity from the moment capital needs ‘were identified or should have been identified’ or ask for the Commission’s approval for these operations. An exception to these principles of burden-sharing is only possible where the stability of the financial system is at risk, or the measures would lead to disproportionate results.
State aid only after final authorisation of the restructuring plan In particular, bank owners and junior creditors will need to contribute before any more taxpayer money is spent on bank bailouts. Commission Vice-President in charge of competition Joaquín Almunia
From now on, a restructuring plan must, in general, be notified to the Commission and a final State aid approval must be obtained before any recapitalisation or impaired asset measure are taken. A provisional, temporary approval of rescue aid will remain possible only in exceptional cases where the competent supervisory authority expressly confirms that the rescue aid is required. The Commission will, to a limited extent, continue to grant temporary approvals for guarantees on liabilities and liquidity support as rescue aid before the notification of a restructuring plan. However, if a capital shortfall is identified at the same time, the rules for prior approval of the restructuring plan will be applied accordingly, unless the liquidity assistance is to be repaid within two months. In addition, a restructuring or wind-down plan must be submitted within a period of two months for each institution in relation to which a liquidity guarantee is granted. By inviting Member States to enter into pre-notification contacts with the Commission the assessment of the compatibility of the aid with the common market and of the adequacy of the burden-sharing are moved forward into an informal pre-notification phase.
Liquidation aid The new Banking Communication codifies the Commission’s case practice regarding liquidation aid. A bank shall be wound up in an orderly fashion if the restoration of the long-term viability is not possible. In principle, aid can be granted to support the wind-up process, provided that the burden-sharing rules for shareholders and subordinated creditors are applied accordingly. In that regard, a wind-up plan must be submitted and the Commission must have authorised the liquidation aid prior to its granting. It remains to be seen whether the Commission's practice in handling liquidation aid will require equally strict creditor participation as for support aid.
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New rules on State aid to banks July 2013
Conclusion and outlook The amended rules limit the future granting of state aid to banks, as from now on shareholders and subordinated creditors will have to fully contribute before tax money can flow into the stabilisation of the bank. Thereby, the Commission wants to take into account the different financial resources of Member States in the Union. Recapitalisation and impaired asset measures may be granted only with the prior approval of a restructuring plan (Spanish model). While the Commission initially wanted to integrate the rules for State aid to banks into the revision of the general rescue and restructuring guidelines, it is now presenting a new, stricter crisis regime for State aid to banks, which will remain in force until changes in market conditions require a revision. This shows that the Commission expects crisis-related State aid cases in the banking sector to continue to occur in the future. Affected banks, their shareholders and creditors as well as the Member States concerned are likely to have much less flexibility in banking stabilisation than before.
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