Competition First? Application of State Aid Rules in the Banking Sector

Abstract

The paper discusses application of the State aid rules in the banking sector. It compares the rules relevant to that sector before October 2008 with the legislative framework adopted as a response to the financial crisis. The research question is focused on how the balance between limiting distortions of competition and rebuilding financial stability is struck, and on a more general level it examines the role of State aid control in managing the financial crisis. The paper finds that the Commission has firmly applied the legal test on the notion of aid, mainly due to its expertise originating from previous cases in the banking sector. On the compatibility level, in the rescue phase the crux of the method is a relaxed approach towards solvent banks, with due safeguards concerning remuneration, exit and lending to the real economy. This allowed the stabilization of the financial system, with the cost of treating competition issues as subordinate. In the restructuring of distressed banks, the overriding aim of financial stability serve to justify various measures that are otherwise not a standard under the R&R Guidelines. For that reason the risk of moral hazard may be hardly evitable in the future. With regard to the management of the crisis, it is submitted that under Article 87(3)(b) State aid should be compatible as a part of a broader structural and regulatory programme.