Eu State Aid Policy: an Analysis of the Banking Sector During the Financial Crisis

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Faculty of Economic, Social and Political Sciences and Solvay Business School

Research Methodology on Economic and Financial Law

EU State Aid Policy: An analysis of the banking sector during the financial crisis

Anthony Dopchie

1st Master of Management Science

January 25, 2011

Prof. Kim Van der Borght

Contents

Introduction3
1.What is State Aid ?4
1.1 Aid by Member States or through state resources4
1.2 Aid must be imputable to the State5
1.3 Recipients of aid5
1.4 Advantage granted5
1.5 Specific versus general measures7
1.6 Effects on trade7
1.7 Distortion of competition7
2.What is not considered to be State Aid?8
2.1 Aid which is compatible with the common market8
2.2 Aid which may be compatible with the common market9
3.Economic analysis of state aid.11
3.1 The benefits of state aid (Spector, 2007).11
3.2 The drawbacks of state aid (Spector, 2007).12
3.3 Conclusion12
4.Rescuing and Restructuring firms in difficulty.13
4.1 The Commission Guidelines13
4.2Rescue and restructuring in the banking sector14
5.State aid for the banking sector during the financial crisis15 5.1 Why state aid for the banking sector?15
5.2 Commission guidelines for measures taken in the context of the financial crisis16 5.2.1 General Principles16
5.2.2 Types of state aid17
6.Cases, figures and graphs.20
6.1Cases20
6.2Facts and figures22
Conclusion24
References26

Introduction

When the financial crisis broke out in the fall of 2008, the whole financial sector was running into serious trouble all over the world. The crisis – triggered by the liquidation of Lehman Brothers in the United States – gave rise to a complete loss of confidence in financial institutions. This resulted in individuals taking their money away from banks, financial institutions drying up the inter-bank lending and banks cutting lending to individuals and companies. In other words, the crisis was a liquidity crisis putting in danger financially sound banks and eventually affecting the real economy. This illustrates the specific and fragile nature of the financial sector: the fact that nearly everything is built upon confidence, and that a loss of confidence in one institution affects the whole sector and by extent the economy. Therefore national governments had to react by rescuing the financial sector. However, member states of the European Union were faced with restrictions imposed by the European state aid policy. State aid policy had been transferred to a supranational level in order to counter abuse, which could lead to a distortion of competition and trade inside the European Union. It is in this context – given the nature of the financial sector and the severity of the crisis – that the European Commission loosened the regulation and allowed national governments to intervene when it was necessary. This paper consists of six sections. The first sections (1 – 2) deal with the legal provisions about European state aid policy. The third section provides an economic analysis of state aid. The fourth section examines briefly the rescuing and restructuring guidelines for firms in difficulty, which may be seen as an introduction to the financial crisis measures. Those crisis measures are outlined in the fifth section. Finally, the sixth section contains facts, figures and graphs about the measures taken during the financial crisis.

What is State Aid ?

In principle, state aid is considered to be incompatible with the common market. Article 107 (TFEU) declares that “save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”. In other words,...
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