EU eases state aid rules for national rescue plans

The European Commission yesterday (13 October) published long-awaited guidelines on state aid for financial institutions as European stock exchanges rebounded following concerted action by major EU economies.

National guarantee schemes for bank deposits will be allowed for up to two years under the guidelines, published by the EU executive on Monday.

The announcement of a relaxation in EU state aid rules came as France, Germany and the UK unveiled multi-billion national plans to rescue ailing financial institutions, triggering a wave of enthusiasm across European markets. London’s FTSE 100 gained more than 7%, with gains in Frankfurt, Paris and Milan of over 10%.

On Monday, France unveiled a €360 billion scheme, available in credit guarantees and loan capital, while Germany announced it would set aside €500 billion for its banking sector in credit guarantees and capital injections. Meanwhile, the UK injected £37 billion into three of the country’s largest financial institutions.

The moves followed concerted principles agreed earlier by the leaders of the eurozone and the UK at a summit in Paris on Sunday (EURACTIV 13/10/08). The principles include:

• State guarantees for new debt issuance.
• Fresh injections of capital into European banks.
• Coverage of the interbank lending market to increase liquidity.
• New accounting rules that temporarily suspend so-called “mark-to-market” accounting, which was blamed for worsening the situation.

EU approval within 24 hours

As a further measure to boost confidence, the Commission guaranteed that national rescue plans would be given the go-ahead within 24 hours if they meet the requirements outlined in its new state aid guidelines.

The guidelines were long-awaited by governments which had been wondering whether their national rescue plans conformed to normally stringent EU state aid rules. This new sense of urgency could prove extremely important in view of the hyper-volatility experienced by markets in recent weeks.

According to the guidelines, public intervention shall be provided “as long as it is necessary to cope with the current turmoil in financial markets”. In particular, guarantee schemes will be allowed for a period of “up to two years,” with the option of a further extension “upon Commission approval” and “as long as the crisis in the financial markets so requires”.

State aid will have to be limited in scope as well, in order to avoid “unjustified benefits for shareholders of financial institutions,” the Commission said.

Moreover, governments will have to ensure that every bank active on their territory will gain access to the rescue measures, regardless of nationality. 

This was one of the main arguments raised by the Commission against an Irish rescue scheme presented two weeks ago. In its original plan, Ireland issued a blanket guarantee for all deposits in six Irish banks, but the scheme excluded other institutions operating in the country, favouring a massive reallocation of funds towards the protected banks, mainly from British financial institutions. 

The revised Irish plan does not include such discrimination and was formally approved by the EU executive late on Monday.

In addition to the non-discriminatory principle, the guidelines also require that banks receiving state support should cover “at least a significant part of the cost of assistance granted” and pay “an adequate remuneration” for the money received.

Read more with Euractiv

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