European Commission offers guidance on the treatment of impaired assets in the EU banking sector | Practical Law

European Commission offers guidance on the treatment of impaired assets in the EU banking sector | Practical Law

European Commission offers guidance on the treatment of impaired assets in the EU banking sector

European Commission offers guidance on the treatment of impaired assets in the EU banking sector

by Simon Burden, Norton Rose LLP
Published on 02 Apr 2009
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Various European governments have recently announced plans to help relieve banks of the toxic debts on their balance sheets. Such assistance will typically amount to financial assistance and so will constitute state aid. To assist the situation, the European Commission has issued a communication on the application of the state aid rules to the treatment of impaired assets in the EU banking sector.
Following announcements by various European governments of plans to address the continuing financial crisis by relieving banks of the toxic debts on their balance sheets, on 25 February 2009 the European Commission issued a communication on the application of the state aid rules to the treatment of impaired assets in the EU banking sector.
The guarantee or purchase of impaired assets on bank balance sheets by EU member states will typically constitute state aid as it will amount to financial assistance or a subsidy to the bank in question. Such aid must be notified to and cleared by the Commission to be lawful.
In assessing such state aid, the Commission is supportive of measures which aim to clear impaired assets from banks' balance sheets. To minimise the inevitable distortions on competition, the Commission emphasises the need for a common and co-ordinated Community approach to ensure consistency between member states in the measures they adopt. The Commission states that member state co-operation before measures are adopted will limit the need for intervention by the Commission after state aid notifications have been made.
To assist co-operation, the Commission sets out its own common guidance on the basic features that relief measures should contain to minimise adverse effects on competition and the single market. These features include:
  • Applications for aid should be subject to full prior disclosure of impairments by eligible institutions on the assets which will be covered by the relief measures.
  • Banks ought to bear the losses associated with impaired assets to the maximum extent. Clawback provisions should be used where it is not possible to achieve full burden sharing beforehand.
  • A common approach to categories of assets and to the valuation of those assets should be developed. This will help minimise the likelihood of cross-border arbitrage between different relief measures.
  • A limited enrolment window of six months should be applied, which should limit incentives for banks to delay necessary disclosures in the hope of higher levels of relief at a later date.
  • Beneficiary banks should be subject to behavioural safeguards to ensure that the capital effects of providing relief are used for providing credit to meet demand.
  • If the evaluation by the member state indicates a situation of technical insolvency, the bank should be wound up, put into administration, restructured or nationalised.