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The Impact of the Financial Crisis On the
Functioning of the Internal Market
Professor Erika Szyszczak
Where Did It Start?
• Lack of national regulation;
• Moral hazard: banks knew they
would be bailed out
• German versus UK perspective
on the cause(s)
• Earlier crises dealt with by
State Aid on ad hoc basis, no
sector specific approach
Combination of Specific State Aid Measures
and Macro-Economic Stimulation Measures
• Crisis first signs in 2007: Northern Rock
(UK) and IKB, SacchsenLB (Germany);
• Bilateral meetings in September 2008
• Sarkozy mini-Summit October 2008
• Commitment to substantial guarantees:
• UK, France and Germany promised: 450
billion euros, 320 billion euros and 400
billion euros .
Previous Banking Crises
• Capital injections
• Guarantees
• Complex interventions: preferential
tax regimes
• To support restructuring of individual
banks or entire banking sector
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Banesto (Italy)
Credit Lyonnais (France)
SDBO (France)
Credit Foncier de France (France)
GAN Group (France)
Banco di Sicilia and Banco di Napoli
(Italy)
• Bangesellschaft Berlin AG
Guarantees
• Commission 2000 Notice; amended 2008
• Reviewed in 2008 as part of Commission
State Aid Action Plan 2005
• No State aid where a market price is paid
and safe harbour for SMEs
• Anstaltslast and Gewahrtragerhaftung
(Germany)
• Ausfallhaftung (Austria)
• Caisse des Depots et Consignations
(France)
Implications for EU Law
• Leads to a regulatory race – to the bottom
or top?
• Liberalisation of Financial Markets
• Use of mutual recognition to create a
common market for financial services
• Reliance upon self-regulation of the
sector: Commission White Paper 2005
• Banks not classified as a “Service of
General Economic Interest” (SGEI):
Commission Inquiry 1998 to Ecofin
Council
Commission Communication From Financial Crisis
to Recovery: a European Framework for Action
• Need for concerted Community
action
• EIB loans
• High Level Larosière Group
established
Commission Response (so far…)
• Banking Communication of 13
October 2008
• Recapitalisation Communication of
5 December 2008
• Impaired Assets Communication of
25 February 2009
Banking Communication
• Based upon Article 87 (3)(c) EC.
• Is this an political or economic
assessment?
• Covers sector as well as individual
banks
• Not a general precedent for reacting
to crises
Conditions for State Aid
1.
2.
3.
4.
5.
Objective and not
discriminatory
Limited in time
Well-targeted
Proportionate
Designed to minimise
negative spill-over effects
The Recapitalisation of Financial
Institutions
• first, remuneration must be as close
to market prices as a way to limit
competition distortions; and
• second, such schemes must be
temporary in character with
incentives for State capital
redemption favouring an early return
to normal functioning of the market.
Impaired Assets Communication
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full transparency and disclosure of impairments, which has to
be done prior to government intervention;
coordinated approach to the identification of assets eligible for
asset relief measures through development of eligible
categories of assets ("baskets");
coordinated approach to valuation of assets ex-ante, based on
common principles such as valuation based on real economic
value (rather than market value), certified by independent
experts and validated by banking supervisory authorities;
parallel viability review of the bank's activities and balance
sheet with a view to assessing its present and prospective
capital adequacy and viability;
validation by the Commission of the valuation of the assets, in
the framework of the State aid procedures on the basis of
uniform assessment criteria;
adequate burden-sharing of the costs related to impaired asset
between the shareholders, the creditors and the State;
Cont.d
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adequate remuneration for the State, at least equivalent
to the remuneration of State capital;
coverage of the losses incurred from the valuation of the
assets at real-economic-value by the bank benefiting
from the scheme;
aligning incentives for banks to participate in asset relief
with public policy objectives, through an enrolment
window limited to six months during which the banks
would be able to come forward with impaired assets;
management of assets subject to relief so as to avoid
conflicts of interests;
appropriate restructuring including measures to remedy
competition distortion, following a case by case
assessment and taking into account the total aid
received through recapitalisation, guarantees or asset
relief, with a view to the long-term viability and normal
functioning of the European banking industry
Stimulation of the Real Economy
• Communication on a European
Recovery Plan.
• Road Map
• Proposals: solvency of
insurance companies, banks’
capital requirements, the
functioning of UCITS.
The Fall Out
• Questions trust: Internal Market versus
belief in competiveness and free markets:
Laval and Viking;
• Solidarity in the “race to the bottom”;
• Can we keep minimum harmonisation;
• Can/should Member States bail-out each
other?
• Implications for the Stability Pact.