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European Commission 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 SPEECH/12/481 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. 2 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. 3 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.
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