Liquidity assistance and the provision of state aid to financial institutions

Ojo, Marianne (2010): Liquidity assistance and the provision of state aid to financial institutions. Published in: Journal of Advanced Research in Law and Economics , Vol. 1, No. Issue 2(2) (December 2010): pp. 137-157.

Abstract

In response to the recent Financial Crisis - after it had been widely accepted that “a serious disturbance in the economy of Member States” had occurred, and that several measures were required to remedy this disturbance, various Commission communications were adopted and these include: The Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (hereinafter "the Banking Communication"), its Communication on the recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (hereinafter "the Recapitalisation Communication"), and its Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (hereinafter "the Restructuring Communication").” The Banking Communication will constitute the focus of this study.

Are rescue aids (as distinguished from other forms of State aids) justified even where the possibility exists that rescue attempts are unlikely to succeed? Should rescue aids still be granted at a point when other measures such as winding down measures and the provision of other forms of liquidity assistance could be introduced?At what point should the Government decide upon the nationalisation of ailing institutions?

Furthermore, should State aids be provided to all classes of financial institutions which are considered to qualify for such aid – as stated within the Banking Communication?

These questions interalia constitute questions which are not only raised in this paper, but which this paper aims to address through a consideration of different State aid rescue and restructuring measures, as well as reference to two rescue aid cases, namely those of Bradford & Bingley (State aid NN 41/2008 – United Kingdom Rescue Aid to Bradford & Bingley) and Hypo Real Estate (State aid NN 44/2008 – Germany Rescue Aid for Hypo Real Estate).

In addition, the impact of the recent crisis on the choice of legislation and legal basis for compatibility assessments, will be highlighted. Whereas State aid to individual undertakings in difficulties is usually assessed under Article 87 (3)(c) of the EC Treaty and the Community Guidelines on State aid for rescuing and restructuring firms in difficulty, the systemic relevance of a financial institution and the impact of such an institution's failure on the economy, has been reflected by the preference for Article 87(3)(b) EC Treaty and Article 107(3)(b) TFEU.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rescue Aids; Liquidity; Banking Communication, Systemically Relevant Financial Institutions; Guarantees; Recapitalisation; Financial Crisis
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G0 - General > G01 - Financial Crises

References

Article 87(1) EC Treaty and the Community Guidelines on State Aid For Rescuing and Restructuring Firms in Difficulty

Article 107(1) TFEU (Treaty on the Functioning of the European Union).

Article 107(3)(b) TFEU : The Requirement of a Condition Aimed at Remedying “a serious disturbance in the economy of a member state.”

Article 87(3)(c) of the EC Treaty and the Community Guidelines on State Aid For Rescuing and Restructuring Firms in Difficulty

DG Competition Staff Working Document, „The Application of State Aid Rules to Government Guarantee Schemes Covering Bank Debt to be issued after 30 June 2010” April 2010

European Commission, Commission Decision of 13 October 2008 in Case N 507/08 Financial Support Measures to the banking Industry in the UK (OJ C 290, 13.11.2008, p. 4)

European Commission, Commission Decision of 27 October 2008 in Case N 512/08 Support measures for financial institutions in Germany (OJ C 293, 15.11.2008, p. 2)

European Commission, Commission Decision of 19 November 2008 in Case N 560/08 Support measures for the credit institutions in Greece

European Commission, Commission Decision of 12 November 2008 in Case N 528/08 the Netherlands, Aid to ING Groep N.V

European Commission, Commission Decision of 25 November 2008 in Case NN 68/08 on Latvian State support to JSC Parex Banka.

European Commission, “State aid NN 41/2008 – United Kingdom Rescue Aid to Bradford & Bingley”

European Commission, „“State aid NN 44/2008 – Germany Rescue Aid for Hypo Real Estate” <http://ec.europa.eu/competition/state_aid/register/ii/doc/NN-44-2008-WLWL-en-02.10.2008.pdf>

European Commission, “State aid N 194/2009 –United Kingdom: Liquidation Aid to Bradford and Bingley Plc

European Commission, “Communication from the Commission — The application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis” (2008/C 270/02)

European Commission, Communication from the Commission — The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (2009/C 10/03)

Petrovic and R Tutsch, „National Rescue Measures in Response to the Current Financial Crisis” ECB Legal Working Paper Series No 8/ July 2009

Reuters, “Hypo Real Estate’s path to Nationalisation” <http://www.reuters.com/article/idUSTRE5381WB20090409 >

Reuters, “Hypo Real Estate is Nationalised with Squeeze Out” <http://www.reuters.com/article/idUSLD67573320091013>