Squaring the Circle : The Financial Crisis, Bank Bailouts and EU State Aid Regulation

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http://urn.fi/URN:NBN:fi:hulib-201508073418
Title: Squaring the Circle : The Financial Crisis, Bank Bailouts and EU State Aid Regulation
Author: Nordström, Lasse
Contributor: University of Helsinki, Faculty of Law
Publisher: Helsingfors universitet
Date: 2015
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201508073418
http://hdl.handle.net/10138/156849
Thesis level: master's thesis
Discipline: European law
Eurooppaoikeus
Europarätt
Abstract: The thesis analyses the impact of the recent financial crisis on EU state aid policy and regulation. The crisis necessitated the granting of significant amounts of government aid to banks that had encountered financial difficulties. The thesis describes the changes that the crisis produced in the legal framework for controlling state aid to distressed financial institutions in the EU. The analysis includes a discussion of certain significant state aid decisions concerning state aid to banks during the crisis. The thesis also discusses whether the Commission’s actions during the crisis departed significantly from the state aid control policy that the Commission had developed prior to the crisis. The theoretical framework of the thesis is based on discussions concerning the economic rationale for controlling state aid. Usually it is argued that state aid needs to be controlled because it has the potential of decreasing the economic efficiency of undertakings, which results in welfare losses for the economy as a whole. State aid control is also deemed necessary in order to secure a level playing field for actors from different Member states and thus to foster market integration. However, state aid control may also be justified in order to promote aid that corrects market failures or aid that aims to promote certain equity objectives. Thus, the aims pursued by state aid policy are multiple and have at times conflicted with one another. The promotion of financial stability, the stated aim of granting state aid to banks during the recent crisis, can be understood as a case of using aid in order to address a market failure (the financial instability resulting from a bank’s bankruptcy) and thus as an efficient use of state aid. The legal rules applied to the control of state aid in normal times are briefly described in the thesis. It is observed that so called rescue and restructuring (R&R) aid is usually considered to be one of the most harmful forms of aid and the Commission has thus in the past underlined that it should only be granted in exceptional situations. The analysis of the Commission’s decisional practice concerning aid to banks prior to the crisis clearly shows that the Commission has been willing to apply standard state aid rules to banks as well, yet however taking into account the specific significance of the banking sector for the economy as a whole. This might be understood to imply that the safeguarding of financial stability is not an aim that was completely foreign to state aid policy even prior the crisis. Banks that received aid prior to the recent crisis were also subject to strict remedies aimed at addressing potential distortions of competition, such as asset reductions, branch closures and behavioural constraints. The thesis then moves on to discuss the crisis legal framework put in place by the Commission from late-2008 onwards. The content of these so called Crisis Communications is discussed. It is observed that even though the Commission did at certain points depart significantly from the standard legal framework for granting R&R aid to undertakings (most notably by introducing the distinction between fundamentally sound and unsound undertakings), the basic characteristics of state aid control regulation remained in place throughout the crisis. The amendments to the standard regime also gradually became less significant, as the crisis regime evolved with the adoption of the Restructuring Communication in August 2010. This continuity in the Commission’s approach is evidenced also by the analysis of certain key decisions by the Commission during the crisis, which shows that the aided banks had to accept remedies that resemble closely the ones applied already prior to the crisis, the former being in certain cases even harsher. It is clear that the Commission was not willing to let significant distortions of competition arise as a result of maintaining financial stability. In the final chapter of the thesis the recent development of EU banking regulation is briefly described. This development aims to make sure that in the future financial crises will not be dealt with government aid but instead with resources granted by the financial institutions themselves. As a conclusion, it is argued that the Commission was in its actions during the crisis trying to pursue two distinct policy aims, namely the safeguarding of financial stability and the avoidance of distortions of competition. This dual policy aim might also explain why the Commission’s actions have attracted some criticism, since the aim of promoting financial stability does not fit easily together with state aid control’s traditional policy objective, the promotion of competition.


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