Brussels lays out restructuring agenda for banks
The European Commission laid out new guidelines for banks receiving government support on Thursday (23 July) in order to avoid distortions of competition within the sector.
Since the fall of Lehman Brothers last September, roughly 30 banks within the EU have received state aid to keep them afloat on condition that a restructuring plan be submitted within six months.
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But banks will have five years to implement their plans, an indication that the commission still considers the current climate extremely difficult.
Philip Lowe, the commission's director-general for competition, said the guidelines were "the ultimate stage in restoring health to the banking sector …which is done by returning individual institutions to viability without state aid."
He cautioned that state aid could not be provided so that banks could continue with a "failed business model."
Instead, the restructuring plans must take account of "the present state of and future prospects of financial markets, reflecting best-case and worst-case assumptions," say the guidelines, which will remain in place until 31 December 2010.
Amongst the clarifications for member state governments and banking executives contained within the document, the commission states that individual banks and their owners must carry their fair share of the restructuring costs.
It "negates the purpose of the aid" if it is used to pay bondholders, said Mr Lowe.
"Once the impression is given that governments will step in to help banks to socialise loses but profits are privatised you have a problem of moral hazard."
Banks that receive state aid will also face behavioural restrictions, so that state aid is not used to compete with other banks when offering financial products such as cheaper mortgages.
Stress tests
Thursday's guidelines indicate that stress testing of individual banks will be a vital component in helping them devise strategies for long-term sustainability.
Stress test results are likely to show that a bank should close down a particular area of its activity or even look to be absorbed by a viable competitor.
"The specificity of the banking sector is the tolerance of bank failure," said Mr Lowe, pointing to government reluctance to let banks fail.
But he added that in a healthy market with good competition between banks, it was only natural that some banks should exit the market.
Unlike in the US, the commission does not envisage the results of stress tests being made available to the public in order to avoid an unpredictable market reaction.
The communication, which indicates that all state aid must eventually be paid back to governments, is the latest commission response to the financial crisis.
In October the EU executive produced an overall communication on bank guarantees. In December it put out guidelines on the recaptialisation of banks and in February it published guidelines on how to deal with toxic assets.