25 September 2013

VP Almunia: Banks in distress and Europe's competition regime - On the road to the Banking Union

Because of the threat of a systemic failure, the Commission – after discussions with the Member States – introduced a new State aid framework tailor-made to deal with rescued banks. And the Commission became de facto a central crisis management and resolution authority.

The new framework identified three main objectives for our action:

• maintaining financial stability;
• safeguarding the internal market; and
• protecting the interests of taxpayers.

Thus, for the past five years the European Commission has been using State aid policy to coordinate the response of Member States; preserve the level playing field in the banking sector; and make sure that bail-outs were carried out according to similar conditions across the Union.

Through our decisions, since 2008 we have evaluated every rescue and restructuring plan for every bank in distress in Europe.

• Overall, we have worked on the restructuring of 67 banks – 23 of which had to be resolved – and we still have 27 restructuring cases open, in particular in the euro area countries under programmes. This is equivalent to around one quarter of Europe’s banking sector in terms of assets.
• In some countries, nearly the entire banking sector was restructured – for example in Greece and Ireland – but this was also the case in countries such as Belgium and the Netherlands.

Returning the banks to long-term viability has been a key element of our assessment. Burden-sharing and the elimination of distortions of competition are also part of our analysis. Unlike the FDIC, however, the Commission has no recourse to funding facilities, which are in the hands of the national Treasuries, the European Central Bank, and national central banks in the Member States...

New Banking Guidelines

To manage this complex transition, the Commission will be equipped with the revised State aid rules for banks – which entered into force in August – updating the framework put in place five years ago.

The new rules introduce three main changes [abridged]:

First, they make clear the principle that before resorting to taxpayers' money, banks should foot the bill by going to the market, using internal resources, and asking for the contribution of shareholders, hybrids holders, and junior debt creditors. This change actually reprises a practice that has already been applied in a number of European countries.

The second major change of our new State aid rules follows from the positive experience of the Spanish MoU approved last year. No State aid in the form of recapitalisation or impaired-asset relief will be approved before the burden-sharing takes place and the restructuring plan is approved by the Commission. We have often seen in the past that the restructuring and stabilisation process would take longer after the funds were disbursed. Under the new system, we will be able to adopt final recapitalisation and restructuring decisions in a shorter period.

The third main change that the new rules introduce is a cap on executive pay for all aided banks. The point here is to give management the right incentives to implement the agreed restructuring plans and have their organisations refund the money received from the public coffers as soon as possible.

As you can imagine, the new State aid framework for banks will be tested in the context of the upcoming balance-sheet assessment and stress test of the ECB. With the new rules we are better equipped to react quickly and to ensure that banks contribute to a maximum extent before tapping public aid. In particular, the burden-sharing principle will help to limit the size of the potential public backstops that might be needed. Banks should also have now the time and the incentive to build up a sufficient capital buffer...

The Commission will use the new State aid rules to keep a level playing field in the Single Market, protect the interests of taxpayers, and ensure stable and predictable conditions for market participants at all times.

When the Banking Union and the new financial regulatory framework are fully in place, Europe’s banks will be stronger and safer. Above all, they will return to their primary function, which is lending to the real economy throughout the European Union. And our financial activities will be better integrated in the Single Market, especially within the EMU.

For this to happen, we must not lose the sense of urgency that prevailed during the G20 summits of end-2008 and beginning 2009 and – more recently – during the European Council of June 2012 which inspired the reforms I have illustrated today. We must not lose momentum. 

Full speech

Europe must make a decision as soon as possible on setting up a strong central authority to handle failing lenders, a key plank of establishing a successful Banking Union, former European Central Bank (ECB) president Jean Claude Trichet urged. "We do not yet have a decision on the single resolution authority and that is extremely important", said Trichet, who was president of the ECB between 2003 and 2011.

"I expect that this decision will be taken in the next few weeks or month and I would call for this to be done as soon as possible, because to have a real Banking Union we need both", he said referring to the supervisory body and resolution authority.

Further speech: Competition and EU policy-making, 26.9.13

Further reporting © CNBC

© European Commission