Enter to open, tab to navigate, enter to select
Credit crisis - EU relaxes state aid rules on banks
Practical Law Legal Update 9-385-2016 (Approx. 3 pages)
Credit crisis - EU relaxes state aid rules on banks
by Michael Grenfell, Norton Rose LLP
| Published on 05 Mar 2009 • United Kingdom |
Speedread
EU rules require that any state aid given to a business must be notified to, and cleared by, the Commission, failing which it must be repaid. As governments across the EU have been forced to provide support to their financial institutions struggling under the financial crisis, the EU has adopted certain measures to relax these state aid rules. The key reforms are summarised here.
In the final months of 2008, the European Commission adopted a series of important measures to relax EU laws on "state aid" in the context of the credit crunch. The aim is to ease some of the burdens on banks and financial institutions across Europe.
The basic EU rules require that any state aid (that is, financial assistance or subsidy given to a business by national or local government or any of its agencies in any EU member state) must be notified to the European Commission. If the state aid is not notified, or if it is notified but not cleared following an assessment by the Commission, it is unlawful and must be repaid.
Key points of the EU measures announced in the past few months are:
- Government guarantees of banks' liabilities for retail deposits and some inter-bank lending will be allowed under the EU state aid rules - provided that they are limited in time and scope, are available to foreign as well as domestic banks, and do not fund aggressive business expansion by the beneficiary banks.
- Government recapitalisation of banks and financial institutions will be allowed under the EU state aid rules - provided that there are incentives for share capital to be redeemed and, in the case of high-risk-profile banks, limits on dividends and executive remuneration.
- Government rescue and recapitalisation for banks will receive "fast-track" treatment by the European Commission following notification under the state aid rules, "if necessary within 24 hours and over a weekend".
- Government support for loans to business (where the companies concerned went into financial difficulty only since 1 July 2008) will benefit from automatic European Commission state aid approval for government assistance up to the end of 2010 in the form of:
- certain loan guarantees with lower risk premiums than were previously allowed, provided that the guarantee does not exceed 90% of the loan and the loan does not exceed the beneficiary company's total annual wage bill;
- certain subsidies of interest rates for bank loans;
- certain subsidies of investment loan finance for new products for environmental protection;
- certain finance for risk capital for small and medium-sized enterprises (SMEs) to a level of EUR2.5 million in any one year (previously the level was EUR1.5 million), and with a private participation requirement of 30% (previously it was 50%).