Friday

3rd Feb 2023

EU approves largest state aid plan in union's history

  • Ornate ceiling at RBS headquarters: the company was once synonymous with prudent banking (Photo: duncan)

The European Commission on Monday (14 December) sanctioned a record state aid plan for the UK's Royal Bank of Scotland (RBS).

"We're talking about a very, very large amount of public aid here, between £60-100 billion (€67-111bn)," said commission competition spokesman Jonathan Todd while announcing the decision to journalists. "This is the largest amount of state aid ever received in the EU's history."

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The scale of support measures for RBS is clear when compared to figures currently being bandied about at a UN climate conference in Copenhagen. EU leaders on Friday agreed to provide €7.2 billion in EU "fast-start" environmental aid for developing countries over the next three years.

Divestments contained in the restructuring plan for the British bank – one of the largest in Europe – will prevent the build up of market distortions as a result of the UK government aid, said the competition watchdog.

A global credit shortage last year saw European governments rush to provide bank recapitalisations and guarantee schemes in a bid to prevent bankruptcies in the systemically important financial sector.

RBS was one of the largest European firms teetering on the verge of collapse, largely the result of aggressive, debt-fueled expansionary activity in recent years, which included the takeover of certain operations within Dutch-bank ABN Amro in late 2007.

In October 2008 the bank received £20 billion (€22 billion) from the UK government in return for giving the state a 70 percent stake in RBS. But the move was dependent on commission approval of a restructuring plan, eventually submitted in June of this year.

Last month London announced details of a second recapitalisation for the bank – this time of £25.5 billion (€28.05 billion) – as well as details of the government's protection scheme for toxic assets.

Divestment details

Divestments crucial to Monday's approval include a large chunk of the bank's mid-corporate and SME lending activities – amounting to roughly five percent of the UK market – together with insurance, transaction management and commodity trading operations.

Commission agreement was also facilitated by a reduction from earlier state aid forecasts, with the bank now also taking responsibility for a larger proportion of the potential losses as a result of writedowns on toxic assets.

"This case has been one of the most complex the commission has had to deal with during the financial crisis," said competition commissioner Neelie Kroes in a statement after the decision.

The Dutch politician - set to take over in the newly created "digital agenda" portfolio after European Parliament hearings in January - said the bank's restructuring plan was an important step towards securing its long-term viability.

But she warned that the commission would be keeping a close eye on the divestment progress.

"Be aware that in case RBS does not deliver on its balance sheet reduction targets by 2013, the commission will be able to intervene again and more divestments will be required," she said.

Austrian parallel

Independently on Monday the Austrian government announced plans to nationalise Hypo Group Alpe Adria, a unit of German public-sector bank BayernLB.

The Austrian government's acquisition of a 67 percent stake in Hypo Alpe Adria for the symbolic price of €1 is designed to stop the bank falling into bankruptcy, and is a clear sign of the ongoing turmoil in the European financial sector.

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