Managing State Aid in Times of Crisis: The Role of the European Commission

Thomas J. Doleys, Ph.D. Kennesaw State University

Department of Political Science & International Affairs Maildrop 2205, Social Science Kennesaw State University 1000 Chastain Road Kennesaw, Georgia 30144 Phone: 770.423.6497 Fax: 770.423.6312 Email: tdoleys@kennesaw.edu

Paper prepared for presentation at the ECPR Fifth Pan-European Conference on EU Politics, to be held June 23-26, 2010, at the University of Oporto and University of Fernando Pessoa, Porto, Portugal.

I.

INTRODUCTION On 15 September 2008, American investment bank Lehman Brothers filed for Chapter 11

bankruptcy protection in US federal court. The filing marked the end for an American banking icon. It is also generally regarded as the beginning of a crisis that has gripped the banking industry in the US and Europe. It did so by triggering a collapse in investor confidence that quickly cascaded through the system. Interbank lending and wholesale funding markets dried up. Banks lost access to the liquidity required to shore-up reserves and offset mounting losses.1 Within days, several prominent European financial institutions including Dexia, Fortis and ING teetered on the brink of insolvency. The scale of the crisis and the speed with which it propagated through the system prompted governments to act quickly and aggressively. They issued loan guarantees, recapitalized ailing institutions and underwrote toxic assets. The sums involved are staggering. Between October 2008 to April 2010, EU governments made available 4.131 trillion in crisis aid through a combination of national schemes and ad hoc interventions an amount equivalent to 32.5% of EU-27 GDP.2 Viewed a little than 18 months on, the general consensus is that the interventions served their purpose. Banks that were fundamentally sound prior to the crisis obtained access to the shortterm assistance they required to weather the worst of the crisis. Firms in the most serious difficulty, particularly those with excessive exposure to toxic assets, were given breathing room to restructure or to begin winding-down in an orderly way. As the sector stabilized, there was also a gradual (if incomplete) resumption in the flow of credit to the real economy. Interestingly, this was achieved without any serious distortions to the internal market or to the ongoing process of integration in financial services. That Europe weathered the crisis without experiencing substantial negative spillovers was by no means a foregone conclusion. Given the closely inter-linked nature of EU economies, government interventions of the scale and scope implemented had significant potential to create distortions. First, there were clear risks of distortions within the banking sector. Banks receiving
1

Many, but by no means all, of these loses were driven by the collapsing value of mortgage backed securities and other structured investment vehicles 2 See 2010 State Aid Scoreboard, Table 1 & Annex 3. Figure includes only aid to financial services sector. It does not include general aid measures designed to stimulate the real economy.

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state assistance would potentially enjoy competitive advantages vis--vis those institutions that did not require (or chose not to take) government aid. Second, there was also the risk of distortions between member states. Banks receiving favorable treatment in one member state might enjoy competitive advantage not available to institutions in states where the assistance was less favorable. Such disparate treatment risked triggering self-defeating (and treasury draining) subsidy races. This project looks at the events associated with the banking crisis. Our general goal is to explain how it was that such a serious crisis might have been addressed without a significant collapse of competitive conditions in the banking sector. We look, in particular, at the role of the European Commission and the political dynamics of Commission-member state relations. We argue that whilst governments deserve credit for bringing stability to banks through their swift and robust interventions, the European Commission merits credit for insuring that those interventions did not undermine competitive conditions in Community markets. The Commission achieved this by steering governments towards desirable behaviors and away from counter-productive ones. Central to this effort were four crisis communications. Issued by Commission competition authorities over the course of the crisis, they outlined how they intended to apply EU state aid rules to the banking sector. They spoke both to the types of interventions that would be acceptable and on what terms. While the communications themselves not legally binding on member governments, member governments and financial institutions took sometimes extraordinary measures to insure that the interventions conformed to Commission expectations. We develop this argument over the balance of the paper. In the first section we outline the analytical framework utilized in this study. We focus on the incomplete nature of EU state aid law, the Commissions delegated authority to apply it and the constraints that affect its ability to do so. In the next section we make explicit two sets of claims that we wish to advance in the paper. In the following section, we review historical events for evidence to support our claims. We conclude the paper with some brief remarks on the limitations of our approach and touch on avenues for further research.

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II.

FRAMEWORK FOR ANALYSIS: Incomplete Contracting, Soft Law and the Commissions Interpretive Authority A. State Aid Rules as an Incomplete Contract The constitutional foundations of EU state aid policy are set forth in Articles 107 and

108 of the EC Treaty.3 On its face, the treaty provides for a relatively straightforward system of state aid control. Article 107 provides a body of substantive rules. Article 107.1 defines state aid and holds that forms of assistance falling within that definition are incompatible with the common market and thereby prohibitable. Articles 107.2 and 107.3 follow with an array of circumstances under which otherwise prohibitable states aid shall (in the case of Article 107.2) or may (in the case of Article 107.3) merit derogation. Art 108, for its part, establishes the procedural rules to govern the system of control. Two provisions are particularly important for our purposes. The first is Article 108.2. This provision endows the Commission with the authority to determine whether an aid measure is compatible with the common market, including whether a measure meets the definition of aid and, if so, whether the aid falls with the exemptions provided in Articles 107.2 or 107.3. The second provision is Article 108.3. This provision can be understood to give practical effect to the Commissions authority. It requires that member states must formally notify the Commission of any plans to grant or alter state aid. While the structure of the system is relatively clear on its face Member governments propose, Commission authorities dispose a closer look reveals a substantially more complex picture. The complexity follows chiefly from the fact that treaty provisions are couched in language that lacks interpretive precision.4 Consider the definition of aid. Article 107.1 defines as aid any measure granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings
3

The articles correspond to Articles 92 and 93 in the original EEC Treaty, and Articles 87 and 88 of the Amsterdam Treaty. For the purpose of consistency, I shall employ the numbering scheme associated with the recently implemented Treaty on the Functioning of the European Union (aka The Lisbon Treaty) throughout. 4 Wernecke (1978: 145) adroitly summaries the five key problems that the language of Article 87 leaves unresolved. They are the definition of which aids are to be included; the specific economic and political criteria for deciding what aids are incompatible; what exactly the Community interest was and how it was to be enforced; what the role and power of the Commission should be; and the extend to which [Article 87-89] were applicable to direct and indirect state involvement in the economy.

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or the production of certain goods shall, insofar as it affects trade between Member States. Given the phraseology, it is simply not possible to stipulate ex ante an exhaustive list of measures that would fall within this definition. What, for instance, does it mean for a measure to distort or threaten to distort competition? How is distortion to be operationalized? What measures should be used? And what about the threat to distort? Absent clear answers to these questions, how are governments to know whether a given measure qualifies as aid (and thus subject to notification)? Similar interpretive gaps exist with the derogations outlined in Article 107.2 and Art 107.3. Take, for instance, Article 107.2.b. What does it mean for aid to make good damage to exceptional occurrences. What makes an occurrence exceptional? For that matter, what qualifies as an occurrence? Clarity would seem essential, since aid meeting this criterion enjoys automatic exemption. And what of discretionary exemptions provided in Art 107.3.b and c (two provisions that figure heavily in our story)? Article 107.3.b provides the opportunity for exemption where aid remedies a serious disturbance in the economy of a Member State. But what parameters define a serious disturbance? Consider also the exemption provided in Article 107.3.c. The provision provides the opportunity for derogation for measures that facilitate the development of certain economic activities so long as the aid does not adversely affect trading conditions to an extent contrary to the common interest. What are certain economic activities? And what standard determines whether trading conditions have been adversely affected to the point that they are contrary to the common interest? In short, while the general thrust of the rule framework provided in Article 107 is clear, neither the language of the constitutive provisions nor the Rome Treatys travaux preparatoires provide detail sufficient to determine how they apply in any given set of circumstances. The structural ambiguity exists renders the provisions non-self-executable meaning that they must be interpreted before they can be applied. B. Delegation, Control and the Limits of Commission Authority In the face of these interpretive gaps the Commissions privileged position under Article 108 would appear to provide it significant leverage over the meaning of the provisions

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in Article 107 (Doleys 2009). It does. Such was undoubtedly the intent of governments when they delegated this authority to the Commission.5 But delegation is not the same as abdication.6 The Commission would not be free to exercise its state aid authority without constraint. Even as governments delegated this authority to the Commission, they also took care to structure their relationship with the Commission in ways to minimize the risk that it could (or would) act beyond what governments deemed acceptable. They did so through an array of monitoring and control mechanisms.7 Some work through the actions of individual governments. For instance, a government that which believes the Commission has acted beyond its authority can ask the ECJ to annul its actions on the grounds of lack of competenceor misuse of powers (Article 230). Other mechanisms require collective action on the part of governments. The one most relevant to our discussion is the exceptional circumstances clause in Article 108. It holds that under exceptional circumstances member governments, acting in concert, can simply declare an otherwise prohibitable aid measure to be compatible with the common market thereby circumventing the Commission authority either to define the measure as aid or to determine whether it qualifies for derogation. It is important to note that governments need not utilize control mechanisms regularly, or even often, for them to be effective. Indeed, the best designed mechanisms will never be used. Their deterrent effect will be sufficient to keep potentially wayward agents in line. The key is credibility. If an agent such as the Commission regards the threat of member government push back to be credible, it anticipates punishment and preemptively adapts its behavior accordingly. C. Soft Law Guidelines as Interpretive Mechanisms The history of EU state aid control has been one of an ongoing dance between member governments who, individually and collectively, regularly utilize public assistance to pursue economic, social and political goals and the Commission whose raison detre is to see that those
5

On the delegated nature of authority in the European Union, see, for example, Doleys (2000), Majone (2001), Tallberg (2002), Franchino (2007). 6 See, examples of EU scholarship that employ principal-agent analytics in an effort to model the political dynamics of delegated authority, see M. Pollack (2003), Doleys (2000) and Tallberg (2002). For a dissenting view, see H. Kassim and A. Menon (2003). 7 For a thorough discussion of the range of monitoring and control mechanisms available, see Pollack (2007)

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aids do not negatively affect the common market. One of the principal determinants of the direction developments have taken has been the Commissions perception of the threat of government push back. Sensitive to this, Commission authorities have generally eschewed direct confrontation. Instead, they have adopted a more measured approach preferring to steer governments in desirable directions. One of the means to this end has been the use of notices, guidelines, frameworks and other soft law policy instruments.8 The Commission has developed many policy guidelines over the years. The Commission has found them particularly useful to interpret the derogations in Articles 107.2 and 107.3 by stating how it intended to apply those articles to specific types of aid activities. The first guidelines addressed how Article 107.3.c applied to regional aid. The Commission later expanded the range of guidelines to cover other forms of so-called horizontal aid, including training aid, environment aid, research and development aid, and aid to small and medium enterprises (SMEs). The Commission has also developed guidelines in an effort to exert control over aid to particular economic sectors, including textiles, synthetic fibers, steel, motor vehicles, and shipbuilding.9 Commission authorities find policy guidelines are useful because they provide a means to indirectly shape the meaning of treaty rules. As soft law, the policy guidelines themselves are not directly binding on member governments. They are, however, binding on the Commission. Thus, by stating how it intends to use its delegated treaty authority, the Commission leverages the compliance pull of hard law to encourage government conformity to its policy preferences.

III.

THE ARGUMENT: Commission State Aid Authority and the Role of Crisis Communications Utilizing this framework, we seek to advance two claims about the Commissions role in

the financial crisis. The first is that Commission authorities have deftly employed soft law instruments in its effort to exert influence over government aid granting behavior during the crisis. Cognizant that a frontal assault on government aid would likely have provoked a political
8

On the instrumental value of policy guidelines, see della Cananea (1993) and Rawlinson (1993). For a more general treatment of the Commissions use of soft law in promoting state aid control, see Smith (1998), Cini (2001), Doleys (2009) and Blauberger (2009). 9 For a up-to-date list of policy guidelines, see the Commissions State Aid Vademecum.

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backlash, the Commission published a series of four crisis communications the Banking Communication, the Recapitalization Communication, the Impaired Assets Communication and the Restructuring Communication. In each communication, the Commission sought to identify what types of government assistance it would regard as acceptable and on what terms. Each built on the one prior. And all of them were rooted in the law and jurisprudence of the longextant Guidelines for the Rescue and Restructuring of Firms in Difficulty (hereinafter R&R Guidelines). However, instead of referencing Article 107.3.c as the legal basis for the Commissions guidance, as had been the case with the R&R Guidelines, it referenced Article 107.3.b. This allowed the Commission to adapt the principles underlying the R&R Guidelines to the particular economic and political circumstances of the banking crisis. The second claim we advance is that the design and execution of those policy guidelines themselves reflect the fluid political circumstances the Commission faced. In the early days of the crisis, political tension was high and the need for timely action acute. Cautious not to be seen as an obstacle to quick action, the Commission adopted a softly, softly approach in the Banking and Recapitalization Communications. As the situation began to stabilize, and the threat of push back began to recede, the Commission took a firmer stance particularly with firms it deemed to have engaged in the riskiest behaviors. This tightening is evident in both the Impaired Assets and Restructuring Communications and is particularly pronounced in the stringent conditions it forced on restructuring firms. THE COMMISSIONS ROLE IN THE BANKING CRISIS

IV.

For expository purposes, we periodize events associated with the banking crisis into three phases. The first crisis response phase covers events preceding and just following the 15 September 2008 collapse of Lehman Brothers. This includes the publication of the Commissions Banking Communication. The second crisis management phase covers late2008 until early-2009 and addresses events surrounding the publication of the Commissions Restructuring and Impaired Assets Communications. The third crisis resolution phase covers the period from early-2009 onward and encompasses the Commissions Restructuring Communication and ongoing efforts by the industry to exit the crisis.

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A. Phase I: Crisis Onset and the Initial Response While is common to point to the collapse of Lehman as the beginning of the crisis, problems in the European banking sector had been evident for some time prior to that. As early as the summer of 2007, the popping of the US housing asset price bubble had begun to ripple through European financial markets. In July, German state owned bank Kreditanstalt fur Wiederaufbau (KfW) extended 26 billion in financial assistance to IKB and Sachsen LB. Later that year, the Bank of England provided emergency liquidity to prop-up British mortgage bank, Northern Rock. These interventions were followed in early 2008 by state bail-outs of WestLB (DE) and Roskilde (DK)10. While Lehman did not cause the crisis, there is little doubt that the decision by the US government to allow Lehman to collapse added fuel to long smoldering embers. With Lehmans demise also went the belief that some firms were too big to fail. Investor panic set in. Interbank lending dried up. Firms whose business model depended on frequent re-financing of short term debt found themselves a liquidity squeeze. EU governments, faced with the prospect of cascading bank failures, reacted swiftly. Bail-out packages were announced for Bradford & Bingley (UK), Hypo Real Estate (DE), Fortis (BE/NL/LU), Dexia (BE/FR/LU) and ING (NL). Governments also pursued more broad-based measures. A number of governments issued guarantees against retail deposits and/or new bank borrowing. Others engaged in emergency recapitalizations. These interventions, though urgently needed, were not without their perils. In the high interdependent context of European banking, one governments rescue risked being perceived as another governments beggaring. This potential was perhaps nowhere more vividly illustrated than in the firestorm created by a bank guarantee scheme introduced by the Irish government. On October 1, 2008, just two weeks after the collapse of Lehman, the Irish Dail authorized a 400 billion government-backed guarantee on bank liabilities, including both retain deposits and bank debt. While financial markets both inside and outside Ireland greeted the announcement positively, political authorities outside of Ireland did not. The source of the concern was not the
10

When the nationality of a bank may be useful to know, but is not obvious from the context, I will include the twoletter abbreviations provided in the European Unions Interinstitutional Style Guide. See http://publications.europa.eu/code/pdf/370000en.htm

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guarantee per se, but the decision to extend it only to Irish majority-owned banks. Irish operations of foreign-owned banks had not been invited to participate. Almost immediately, funds from non-Irish institutions operating inside Ireland (mostly British-based) started to migrate to institutions covered by the guarantee scheme. Funds also started to flow in from abroad most of it across the Irish Sea. British Prime Minister Gordon Brown, taken aback by the move, announced his governments intention to restrict the inflows into these Irish institutions (FT 2 Oct 08). In his Financial Times blog, Willem Buiter, Chair of European Political Economy at LSE, characterized the situation this way:Financial crises may not be the best time to make friends and influence people, but the Irish guarantee is the most inyour-face beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plagueridden corpses into the cities they were besieging.11 Clearly sensing the collective challenge posed by individual efforts to deal with the crisis, the Irish guarantee scheme was high on the agenda when EU finance ministers convened on 7 October. In a press release issued at the end of the meeting, the ministers announced that while there was a need to take all necessary measures to restore confidence and proper functioning to the sector, and that those public interventions were appropriately decided at the national level, they also emphasized that interventions should be provided within a coordinated framework and on the basis of common principles.12 To this end, they called on the Commission to act quickly to provide the necessary guidance. Though the communiqu reflected solidarity on the need for a coordinated response to the crisis, it left some doubt whether governments were equally committed to the stringent application of EU state aid rules as a component of that response. Finance ministers, in calling on the Commission to act quickly, also took the occasion to emphasize the need for state aid rules to be applied flexibly.13 While it is impossible to say what precisely member governments had in mind when opting to include this term and it is very likely that different
11

Mavercon, http://blogs.ft.com/maverecon/2008/10/the-irish-solution-unlawful-beggar-thy-neighbour-and-shortsighted-but-apart-from-that-ok/ (last accessed on 8 June 2010). 12 Immediate responses to the financial turmoil ECOFIN Council Conclusions, 7 October 2008, 13930/08 (Presse 284). 13 A similar subtext can be detected in communiqu published at the end of the 15-16 October 2008 Brussels European Council. In the current exceptional circumstances, European rules must continue to be implemented in a way that meets the need for speedy and flexible action. The European Council supports the Commissions Implementation, in this spirit, of the rules on competition policy, particularly State aids, while continuing to apply the principles of the single market and the system of State aids (emphasis added) Council of the European Union, Presidency Conclusions, 15-16 October 2008, 14368/08.

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governments had different things in mind the fact there was sufficient consensus to include such language in the communiqu suggests they expected the Commission to be more accommodative of state aid than the rules might otherwise allow. The Commission responded quickly. On 13 October 2008, just a week after the finance ministers meeting, Commission competition authorities published a communication addressing state aid to the banking secor. The document, known generally as The Banking Communication14, stipulated how the Commission would apply state aid rules to a broad range of emergency interventions, including bank and deposit guarantees, recapitalization measures, and other forms of liquidity assistance. The Commissions approach in the communication as strongly influenced by established practice as embedded in the R&R Guidelines.15 First adopted in 1994, updated in 1999 and again in 2004, the R&R Guidelines grew out of a need to clarify what forms of aid would merit derogation from prohibition under Article 107.2.c as aid to facilitate the development of certain economic activities. Central to the guidelines were three principles government aid, whether provided to rescue an ailing firm or to facilitate its restructuring, must be well-targeted, proportionate and contain safeguards to prevent undue distortion of competition. The Banking Communication was true to these principles reiterating them explicitly. To give effect to them, the Commission included in the communication six cumulative conditions that must be met if a proposed rescue measure expected to receive clearance. 1. The aid must be provided in a non-discriminatory manner. Significantly, access to the aid cannot be based on nationality. 2. The aid must be limited in time, generally not exceeding six months. 3. The aid must be clearly defined and limited in scope to only what is absolutely necessary to address the crisis. Guarantees are allowed if they stimulate new interbank lending. But such guarantees can extend only to so-called Tier-1 capital (i.e., equity capital and declared reserves). Tier-2 capital, such as subordinated debt, is excluded. 4. The aid must be proportionate to the objective of stabilizing financial markets.
14

Communication from the Commission - The Application of State Aid Rules to Measures Taken in Relation to Financial Institutions in the Context of the Current Global Financial Crisis, OJ C 270/02 of 25 October 2008. 15 Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty, OJ C 244/02 of I January 2004.

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5. The aid must include an appropriate contribution by the firm receiving assistance. 6. The aid must include appropriate mechanisms to minimize negative spill-over effects on other firms, other sectors and other member states. This will likely involve limitations on commercial conduct and/or limitations on the size of the balance sheet of beneficiaries. The guidelines included another provision drawn from the R&R Guidelines. Firms that avail themselves of government assistance whatever the form and whatever the amount are expected to restructure. Pursuant to this, firms that utilize crisis aid are to submit restructuring plans to the Commission within six months. Though the R&R Guidelines served as the legal and policy point of departure, the Commission departed from them in a number of respects. Two are particularly noteworthy. The first concerns the legal basis of the guidance. Whereas the R&R Guidelines indicate what actions the Commission regards as appropriate within the meaning of Article 107.3.c (aid to facilitate the development of certain activities), the Banking Communication refers instead to Article 107.3.b (aid to remedy a serious disturbance in the economy of a Member States) as the legal focus of the communication. The Commission argued that the alternative legal basis was necessary due to the systemic nature of the crisis. Notes the Commission: It seemed arbitrary to allow the application of Article [107.3.b] of the EC Treaty in case Member States were taking action as regards the entire sector or big systemic banks, while smaller banks would still need to revert to Article [107.3.c.] of the EC Treaty.16 But the alternative legal basis had more practical, politically-salient effects. Using Article 107.3.b allowed the Commission to treat the banking sector as special something neither the EC Treaty nor the R&R Guidelines provide (DSa 2009:143) What is more, given that member governments were already pursuing a range of systemic interventions that could not easily be captured by Art. 107.3.c, the rigid application of the R&R Guidelines might have put the Commission in the difficult (political) position of having to declare incompatible aid measures that had already been implemented. Another value of Article 107.3.b is that it was largely untested. The article had only twice before been used to authorize aid (FT 5 Dec 2008). It thus lacked the established interpretive content associated with 107.3.c. It was more malleable and therefore an inherently more
16

Spring 2009 State Aid Scoreboard, p. 10

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flexible basis on which to authorize aid. In the words of one legal scholar, Art. 107.3.b endowed the Commission with the ability to create instant state aid law (Koenig 2008) The second noteworthy departure from established R&R Guidelines concerned procedure. The guidelines utilized a slightly modified version of standard state aid procedures as provided in Regulation 659/99.17 They include inter alia that aid be notified and that governments withhold implementation until the Commission completes a preliminary examination of the compatibility of the aid. Under normal circumstances, that preliminary examination could take up to two months. In the R&R Guidelines, the Commission commits to completing the preliminary exam within a month but only if the aid does not exceed 10 mil. For reasons that are obvious, such procedural constraints would have been neither economically prudent nor politically acceptable given the rapidly deteriorating circumstances. In the Banking Communication, the Commission pared-back this timetable considerably.. So long as governments notify plansas early and has comprehensively as possible, the Commission will ensure the swift adoption of decisions within 24 hours and if necessary over a weekend.18 In the weeks following Lehman, the Commission approved a number of high profile bailouts. It approved a measure to provide emergency liquidity to Fortis in one working day and a decision on a rescue package for NordLB over a weekend. The Commission also gave proposed guarantee and recapitalization schemes accelerated treatment. A Finnish guarantee scheme was approved in two working days, as was a UK support scheme. The Commissions decision both to link its policy response to the R&R Guidelines as well as its departures from them are important for understanding the Commissions role in the early days of the crisis. Commission competition authorities found themselves in the difficult position of having to reconcile their role as guardian of the Treaty and administrator of state aid rules with the recognition that there was a limit to what they were could do given the political environment. Discretion being the better part of valor, the Commission sought to articulate firm principles whilst simultaneously becoming both more flexible in its approach to substantive rules and more relaxed with procedural requirements. Given the circumstances, such compromises are easy to understand. It was, as one commentator put it, a pragmatic way to handle the situation (Hall 2009:2)
17

Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 (now Art.108) of the EC Treaty, OJ L 83/1 of 27 March 1999. 18 Banking Communications, paragraph 53.

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The Commissions clear now and assess later approach had its costs (Werner & Maier 2009:181). Despite repeated efforts to remind both governments and firms that it would be flexible on procedure, but firm on principle, it was not clearly how the two could be compatible at least in the short term. As Jaeger (2009) notes, the breathtaking speed with which the Commission approved some measures could not help but compromise its ability to engage in a thorough evaluation of the legal issues never mind its ability to engage in the type of rigorous economic analysis to which the Commission had committed itself as part of the modernization undertaken as part of the Sate Aid Action Plan.19 The Commission skillfully exploited the malleability of state aid concepts like necessity and proportionality to provide itself the interpretive space to authorize aid whilst retaining the veneer of evaluative rigor. Given Commission compromises both procedure and substance, one might ask whether it could have done otherwise? The short answer is, probably not. It is unlikely that governments would have countenanced a delay in aid either on the pretext of evaluating substance or in observing procedure. Observed Werner and Maier (2009:182): [speedy decisions] were necessary and probably the only way to maintain some State aid control during the crisis. A more rigorous approach would have risked being ignored by the Member StatesIt also did not seem entirely excluded that the Member States would change State aid rules if the Commission does not show some flexibility. To DSa, the ability of the Commission to conjure instant state aid law with the Banking Communication merely heightens the impression that the measures adopted were primarily the result of political considerations and pragmatic solutions rather than a resolve to apply the rule of law (DSa 2009:144). This said, one should take care not to overstate the degree to which Commission authorities were marginalized. Governments did not, as they might have, wantonly ignored or circumvented Community rules. Indeed, calls from some quarters that the Commission should suspend state aid rules were brushed aside. What is more, the evidence indicates that governments took care to conform to the Banking Communication. They observed their notification obligation and the content of the interventions were in line with the guidance provided in the document.

19

Anestis and Jordan (2010) come to a similar conclusion.

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B. Phase II: Crisis Management The month or so after the fall of Lehman Brothers was a time of high drama in European financial markets. There was the very real sense that the sector had fallen gravely ill (albeit from a largely self-inflicted wound). In the first days, governments responded by administering triage. The chief goal at the time had been to stop the patient from dying. But those responses were the equivalent of putting a 1.8 trillion band-aid on a bullet wound. More radical interventions were required. It was in these efforts that the Commission sought to further influence the course of policy. Stage 1: Recapitalizations Government interventions in the first weeks of the crisis came primarily in the form of guarantee-based schemes (DK, FI, PT, IE, NL, SE, FR, IT). By November, attention had started to turn to recapitalization and the need to confront the large volume of nonperforming assets weighing down firm balance sheets.20 Governments again turned to the Commission for guidance. Although the Commission had addressed recapitalization measures in the Banking Communication, the guidance is provided was proving inadequate to address the nature, scope and conditions of the schemes governments were considering. The central issue with which the Commission found itself grappling was that of pricing. When markets are functioning correctly, pricing capital injections is generally determined by the risk profile of recipients. But given the collapse of interbank lending, the drying-up of wholesale credit markets and the continued deterioration in the balance sheets of many firms, it became difficult to calculate the risk profiles. The need for the Commission to address pricing in a more robust manner is illustrated in a couple of confrontations it had with governments over the issue. The first involved a proposed 8.2 billion capital injection by the German government into ailing Commerzbank (FT 5 Nov 09). The plan called for the government to inject capital in two tranches of 4.1 billion with the first having an 8.5 percent coupon and the second having a 5.5 coupon. When notified about
20

The Commission also introduced draft legislation designed to address some of the structural problems that gave rise to the crisis. They included a revision of the Capital Requirements Directive, a revision of the Directive on Deposit Guarantee Schemes, and a new Solvency Directive for the Insurance Sector.

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the proposed injection, the Commission indicated that the terms were too favorable and risked creating competitive distortions. Authorities insisted that remuneration should be no lower than 10 percent the minimum being applied across the board. The impasse led the Commission to withhold approval of the intervention. But the issue was brought to high relief in a confrontation between Commission authorities and the French government. In late November, the French government proposed a 10.3 billion preventive recapitalization scheme designed to bolster the balance sheets of the countrys six main retail banks (BNP Paribas, Societe Generale, Credit Agricole, Caisse dEpargne, Banque Poulaire and Credit Mutuel). In exchange for the capital injection, the banks would be expected to increase the stock of private and commercial credit by 3-4 percent in 2009. The injection was designed to counteract an escalating credit crunch that was being felt in the real economy. Weak balance sheets, tight wholesale credit markets, and increased sensitivity to risk had led to a severe tightening of commercial and retail credit market. In response, governments such as France had begun to contemplate preventive recapitalizations whereby they would provide capital to help bolster the balance sheets of otherwise fundamentally sound banks who, in return, would agree to increase their lending. When informed of the French scheme, Commission official expressed reservations. The problem was that the Banking Communication made no provision for type of preventive recapitalizations being proposed. If anything, it seemed to prohibit them. Commission authorities expressed concerns on two linked grounds. The central issue, as it had been with Commerzbank, was pricing. Under the proposed scheme, securities issued by the banks would receive an average return of about 8 percent. The Commission claimed the level was too low. In line with established policy, it sought a minimum remuneration of about 10 percent.. Second, the Commission was concerned that the new liquidity, by bolstering the banks balance sheets on what were favorable terms versus what the banks would have received in the market, would put them in a competitively advantageous position vis--vis other financial institutions operating in France. It had been the Commissions position since the onset of the crisis (and embodied in the Banking Communication) that banks could not use state aid to increase their lending (FT 29 Nov 08). French officials were furious, calling the Commissions position ridiculous and stupid (FT 29 Nov 08). They accepted the argument that banks that had to be rescued such as Dexia,
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Fortis and Northern Rock should have to deleverage and perhaps be wound-down. For those banks, it made no sense to allow them to expand their lending. But to treat the banks at issue the same as distressed banks was unwarranted (FT 9 Dec 2008). But for frozen wholesale funding markets and market pressure to bolster their balance sheets, they would be lending. To deny these otherwise healthy banks this liquidity would only serve to exacerbate the intensifying credit crunch (FT 29 Nov 08). Whether it was mounting political pressure from banks and member governments, or the internal realization that policy needed to more directly address the credit crunch, Commission authorities gradually began to strike a more accommodative stance. Speaking before EU finance ministers at their 2 December 2008 meeting, Commissioner Kroes re-emphasized her view that [s]tate aid rules are part of the solution, not part of the problem.21 She defended the need to maintain a level playing field and to make certain that one countrys problems were not exported to their neighbors. At the same time, she noted that the Commission was willing to be pragmatic, to be proportionate, and to offer member states flexibility in the exact design of their schemes.22 To this end, she vowed to put a fresh emphasis on distinguishing fundamentally sound banks from those in distress, and to be more flexible in the repayment terms offered to the former (FT 3 Dec 08). Three days later, on 9 December 2008, the Commission issued its second guidance document. Known as the Recapitalization Communication23, the document provides details about how capital injections should be priced and under what conditions. The communication was portrayed in the financial press as a concession by the Commission (FT 9 Dec 08). It was so chiefly because the Commission appeared to climb-down on the issue of pricing. Under the communication, funds provided to fundamentally sound institutions could carry an average price corridor of 7 percent to 9.3 percent, far below the 10 percent minimum upon which the Commission had earlier insisted.24 While undoubtedly a concession, the Recapitalization Communication was far from a capitulation. Even as the Commission agreed to show more flexibility in its approach to
21

State Aid: Commissioner Kroes Briefs Economics and Finance Ministers on Financial Crisis Measures MEMO/08/757 of 2 December 2008. 22 Ibid. 23 Communication from the Commission - The Recapitalisation of Financial Institutions in the Current Financial Crisis: Limitation of Aid to the Minimum Necessary and Safeguards Against Undue Distortions of Competition, OJ C 10/03 of 15 January 2009. 24 Ibid., paragraph 27.

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pricing for fundamentally sound institutions, it sought to hold the line with banks in distress. Should such banks seek additional recapitalizations, the communication provides for a range of compensatory requirements that reach beyond the rather more vague statements incorporated in the Banking Communication. These institutions would be subject to, among other things, significantly higher coupon rates and a restrictive dividend policy. Moreover, all distressed firms accepting capital would be required to submit to the Commission a restructuring plan within six months (a requirement not placed on fundamentally sound institutions).. By incorporating into the communication the distinction between sound and unsound banks, the dispute with the French government was effectively resolved. Within hours of publishing the communication, the Commission formally approved the French aid scheme. In the days that followed, it also approved recapitalization schemes for Austria (9 Dec), Italy (23 Dec) as well as modifications of previously approved German (13 Dec) and British (22 Dec) schemes. Stage 2: Fixing Impaired Assets At the same time that Commission was fashioning guidance for recapitalizations, it was also considering what direction to give those firms and governments who were beginning to address the nonperforming assets that weighed down the balance sheets of some of the most troubled firms. Guarantees and recapitalizations served only as a cushion against asset impairment. So long as markets remained uncertain about future valuation of assets on bank balance sheets, institutions were unlikely to gain renewed access to wholesale credit markets. But the desire to deleverage was not the same as deleveraging. There was no functioning market for toxic assets. The collapsing value of CDOs made it virtually impossible for banks to shed them. With no market, banks had to hoard capital as a buffer against future write downs. This served only to further choke-off lending to the real economy. Clearing these assets was as a prerequisite for a return of investor confidence and, ultimately, to the long term viability of the firms holding them. The scale of the problem was considerable. Although it is difficult to know the full book value of nonperforming assets in European banks, German finance minister Peer Steinbruck estimated that German banks alone were burdened by approximately 850 billion in troubled assets (FT 12 May 09). The need to address the issue head-on was noted by Internal Market
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Commissioner Charlie McCreevy, If we dont face up to this issue, then we risk prolonging this crisis with zombie banks that are incapable of performing a useful role in our economies (EurActiv 26 Feb). Several governments were actively considering government-backed asset relief mechanisms. Among them was the German government, whose troubled landesbanken were overflowing with troubled assets. In January 2009, the government announced plans to create a series of bad banks into which troubled firms could funnel their illiquid assets (FT 31 Jan 2009). Under the proposal, the banks would be allowed to price assets at book value instead of marking-tomarket (i.e., current market value). But the scheme required Commission approval. In anticipation of this, German authorities sought guidance as to the compatibility of such a scheme with state aid rules. But, just as had been the case with the French preventive recapitalization proposal, the Commission had nothing in situ. Neither the Banking Communication nor the Recapitalization Communication dealt directly with such schemes. The challenges facing Commission competition authorities as they once again sought to design guidance document were considerable. A number of questions had to be answered. What assets qualify for relief? Who should pay the costs of moving these assets of bank balance sheets? But most significant challenge was asset valuation. No market existed for toxic assets. Consequently, there was no way to mark-tomarket to determine fair value. And given the collapse in value of the underlying assets, there was no prospect of a market emerging. How, then, should these assets be valued? And, what about holders of so-called impaired assets? These are assets that holders have reason to believe retain the possibility of delivering revenue in the long term. What are these assets worth for the purposes of government relief? Providing a workable valuation methodology was critical. Value assets too low and the write-down mechanism might not give the firm adequate relief. Value the assets too high and that would shield firms from bearing the costs of their poor investment decisions. It would create also market distortions that disadvantage those firms who do not hold these assets and thus do not require relief. Finally, it was important that valuations not only be correct but also coordinated. Unless there is a common valuation method, some banks may better terms from their governments when they offload their toxic assets than others, leading to distortions of competition in the single market.
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After extensive consultation with member governments, the Commission published the third of its crisis communication on 25 Feb 2009. This communication, known as the Impaired Assets Communication25, shared many similarities with its predecessors. Like the others, it explicitly referenced the 2004 R&R Guidelines. Also like the others it utilized Art 107.3.b as its legal basis. The Impaired Assets Communication addressed a variety of measures governments might employ for dealing with impaired assets. They included segregating assets into a special purpose vehicle (e.g., bad banks), indemnifying assets against loss through an insurance scheme, engineering asset swaps, or a hybrid of such arrangements. Whatever the specific form the proposed impaired asset scheme took, the Commission held that it must include specific measures. The proposed scheme should identify clearly the categories of assets covered and to what extent. Those banks wishing to take advantage of government measures must provide full ex ante disclosure of impairments based on a common valuation methodology. That methodology, designed by the Commission in consultation with the European Central Bank and building on the recommendations of the Eurosystem, uses real economic value (not book value) as the benchmark.26 Moreover, assessments of real economic value, while conducted by governments administering asset relief measure, are subject to evaluation by the Commission in conjunction with an assembled panel of valuation experts.27 Finally, the communication required all firms availing themselves of an impaired asset scheme must submit to restructuring. In that plan, the firm must demonstrate a clear plan to return to long-term viability. It must also include provision that will remedy competitive distortions created by the utilization of state aid. This may, and in many situations would, include downsizing and divestment of profitable business units. Publication of the communication opened the way for a number of impaired asset measures. The UK, Germany and Ireland each set-up national schemes. On 26 February 2009, the day after the Commission published the communication, the Royal Bank of Scotland announced that it would sign-on to the UK scheme, to the tune of 281 billion (309.1 billion). That announcement was followed a little over a week later by an announcement by Lloyds
25

Communication from the Commission on the Treatment of Impaired Asses in the Community Banking Sector, OJ C 72/01 of 26 March 2009. 26 Real economic value is determined by looking at the cash flow prospects of the asset over the long term. 27 Impaired Assets Communication, paragraph 43.

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Banking Group that it, too, would seek the shelter of the UK scheme. In its case it would seek resolution of 265 billion (296 billion) in troubled assets. Asset relief measures were also utilized to ring-fence troubled assets held by WestLB, ING, KBC, LBBW, Hypo Real Estate, and Northern Rock. In the course of my research I was found little government concern with the emerging shape of the Commission impaired assets regime. The effort appeared more of a technical exercise than a political struggle. Unlike the tension that surrounded efforts to fashion the Banking and Recapitalization Communications, the political dynamic between Commission and member states remained stable. Of the elements that might have provoked disagreement, valuation was the most likely. However, the Commissions decision to consult closely with the ECB likely blunted any potential concerns. This does not mean implementation has not posed some challenges. The Irish government had significant difficulty getting its impaired asset regime in place. The Commission expressed concern that the rules governing the operation of National Asset Management Agency (NAMA) was not sufficiently transparent (particularly with respect to asset valuation) and did not adequately provide for burden-sharing between banks and taxpayers (Euractiv 23 Feb 2010). On 26 February 2010, almost a year after the scheme was first proposed, the Commission gave its formal approval. This opened the way for government to shift up to 81 billion in troubled assets from the balance sheet of the countrys largest banks into a bad bank (FT 30 March 2010). C. Phase III: Crisis Resolution Following the publication of the Impaired Assets communication, Commission attention turned towards crisis resolution. Central to this effort would be restructuring restructuring not just of the firms who required aid to stave-off collapse, but a restructuring of the financial sector as a whole. Commissioner Kroes took the view that the only way to effective resolve the crisis was to alter fundamentally the way banks did business so that a crisis of the sort triggered by Lehman could not recur. This perspective was given voice in a number of speeches. At a conference of banking officials organized by Deutsche Bank delivered the day before the six month anniversary of the
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Lehmans collapse, Kroes pointed to the need to get their financial houses in order. Half solutions, she said, wont help. [The Commission is] aiming to clear balance sheets, either through restructuring or winding down of banks, so that the survivors have the best chance at a healthy future. She continued, We must replace unsustainable, overleveraged structures with simpler, less leveraged, more prudent and more transparent forms of banking.28 In a speech later in the year, she notes that while some banks may have been too big to fail, none are too big to restructure.29 In yet another speech, she notes with favor an observation made by a competition lawyer that [Commission officials] are in a sense doing the work that banking regulators should be doing.30 Rhetoric aside, the Commission could not engineer changes by edict. The Commission had no regulatory authority over banking or financial services. And though the De Lerosiere Report31 mapped a path forward, fundamental reform would take time and would necessarily involve member governments and the European Parliament. And then there were the banks themselves. Though weakened financially, they continued to wield considerable political influence. They were not likely to sit idly by while the Commission sought to rework their industry. Though the Commission lacked the explicit power to regulate banking, it did have a resource that would prove crucial in its effort to cultivate change the authority to approve restructuring plans. Whether availing themselves of aid approved on the basis of the 2004 R&R Guidelines or on the basis of one of the crisis communications, firms benefiting from a government bail-out were required to submit to the Commission restructuring plans within six months of receiving assistance.32 A central focus of the Commissions efforts in this regard was the problem of moral hazard. Financial firms could not be allowed to believe that state resources were a permanent backstop for risky business plans. This must be the case, in particular, for systemically
28

Kroes, Neelie. 2009. Time for Banks to Shoulder Their Responsibilities, speech delivered 14 March 2009 (SPEECH/09/117) 29 Kroes, Neelie. 2009. Competition Law in an Economic Crisis, delivered 11 September 2009 (SPEECH/09/385) 30 Kroes, Neelie. 2009. Banks Must Reform and Restructure, delivered 23 June 2009 (SPEECH/09/306) 31 De Larosiere, Jacques (Chair). 2009. Report from the High Level Group on Financial Supervision in the EU (The De Larosiere Report), 25 February 2009. 32 The exception in this regard were firms regarded as fundamentally sound but who receiving aid as a means to enhance the flow of capital into the real economy.

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important institutions. While the Commission lacked the power to penalize firms just because it adjudged them to be too big or their business plans to be too stupid, it did have the authority, as guardian of the single market to prevent competitive distortions. It would use this remit with some skill to oversee a fundamental reorientation of some of Europes biggest financial firms. Moreover, because this effort was done under the imprimatur of the Commissions formal treaty authority, it was to pursue its goals largely insulated from government influence or interference. Two examples illustrate the scope and depth of changes the Commission was demanding. The first involves Commerzbank. At the onset of the crisis, Commerzbank was the second largest private bank in Germany with 1.1 trillion in assets. In the wake of Lehman and the contraction of interbank lending, the bank was unable to secure the liquidity it required to meet its obligations. It asked for and was granted an 18 billion recapitalization package. Under the terms of the Recapitalization Communication, on which basis the Commission approved the capital injection, Commerzbank was asked to submit to the Commission a restructuring plan. Negotiations with Commission over elements of the package were protracted. The Commission insisted that restructuring address what it regarded as the fundamental problems with its business model. The final package, approved by the Commission on 7 May 2009, was noteworthy for both its scale and scope. Commerzbank committed to refocusing operations on its retail and corporate banking operations. To do this it would divest itself of investment banking and its commercial real estate holdings. It was also committed to a number of behavioral constraints, including a ban on paying dividends, a three year ban on the acquisitions of competitor and prohibition on acting as a price leader. When completed, the Commissionmandated cost of Commerzbanks 18 billion bail-out will be a 45 percent (c. 500 billion) reduction in its balance sheet from pre-crisis levels. The story is similar with ING. On 20 October 2008, only days after the collapse of Lehman, ING entered into an agreement with the Dutch government for a 10 billion capital injection. Due to continued deterioration in its balance sheet, it returned to the state for a second time just three months later. This time it secured a government-backed illiquid asset support mechanism to cover its 27.7 billion exposure to mostly-American mortgage backed securities. As had been the case with Commerzbank, ING was obliged to submit a restructuring plan. And like Commerzbank, the effort to do resulted in extensive negotiations with Commission officials.

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The results, as it turns out, were also similar. Once completed, a restructured ING will be about 45 percent smaller than the 1.2 trillion firm it had been prior to the crisis. The Commissions fingers were all over the deal. Noted one financial analyst,The reason they are selling the whole lot is because Kroes told them toThey dont want to (FT 27 Oct 2009). Read a headline in The Economist after the ING decision was announced: A dramatic restructuring for ING. Which big European bank is next? (Economist 27 Oct 09). If the Commissions strategy early in crisis had been clear now, assess later, later had clearly arrived. Although the Commission was pushing an ambitious restructuring agenda, it understood the effort could not be haphazard and its methods needed to be transparent. To address these matters, the Commission issued a fourth crisis communication. Published on 23 July 2009, the Restructuring Communication sought to crystallize evolving Commission practice. As with the other crisis communications, the R&R Guidelines served as its point of departure. The Restructuring Communication reiterated principles that had long guided the Commissions approach to restructuring. They included the requirements that firms: 1) must establish their long-term viability, 2) must bear most of the restructuring costs, and 3) must take measures to avoid undue distortions of competition. But, as with previous communications, the Commission also adapted the R&R Guidelines to take into account the particular features of the industry and special circumstances surrounding the crisis. For instance, to establish the long term viability of their revised business models, the Commission required specifically that restructuring banks conduct a battery of stress tests. The Commission also elaborated the range of remedies that may be required to limit distortions of competition, including both structural remedies (e.g., divestments) as well as behavioral constraints (e.g., constraints on acquisitions and aggressive pricing). On the basis of the principles set forth in the Restructuring Communication, the Commission is in the process over overseeing the overhaul of some of Europes largest financial institutions. The scale of the carnage is immense. In addition to Commerzbank and ING, planned or approved restructuring packages will see WestLB and Hypo Real Estate reduced by 50%, the Royal Bank of Scotland and LBBW reduced by 40%, Dexia reduced by 35%, and Lloyds Banking Group down by 20% from pre-crisis levels. Danish bank Roskilde and Bradford & Bingley, a British mortgage and savings firm, are in the process of being liquidated altogether.
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Commission efforts have not escaped criticism. There has emerged a current of opinion that the Commission may be going too far. Acting under what one commentator suggested was a generous interpretation of her mandate, Kroes and her colleagues were requiring remedies structural and behavioral that were going well beyond what many expected (Economist 5 Nov 09). In a surprisingly frank public comment, Axel Weber, President of the German Bundesbank, criticized the Commission for its approach to restructuring. He expressed concern that Commissions emphasis on core businesses might firms to withdraw from pan-European operations to safety and familiarity of domestic markets. Were this occur, it would undermine the emerging single market for banking services. And, in so far as banking became more nationally-focused, Europe would forego a lot of its growth potential (FT 22 Apr 09). He continued, If banks are forced to sell-off profitable businessesI think this creates a problem. Dealing with rescue operations in that way, the probability of a credit crunch in the euro area increases rather than decreases due to these restructuring conditions (FT 22 Apr 09).33 But the Commission has remained steadfast. Kroes responded to Mr. Webers comments almost dismissively, indicating that they displayed a clear misunderstanding of what the Commission was doing and its likely effect (FT 23 Apr 09). In the usually staid world of banking, this remarkable exchange serves to highlight that the Commissions policy agenda, while welcomed by some was certainly not being universally embraced.

V.

CONCLUDING REMARKS

It is a bit early to draw any strong conclusions about the Commissions role in the banking crisis, but it is possible both to highlight some achievements and to identify some open challenges. First, the Commission can rightly claim to have advanced the three main goals it set for itself. It has provided a measure of legal certainty to both firms and governments through the publication of its crisis communications. The contents of the communications themselves have gone some distance in both protecting the integrity of the internal market and in maintaining a
33

Perhaps the most interesting challenge to be issued against the Commissions agenda was initiated by ING one of the firms whose dismantling the Commission oversaw. [FT 28 Jan 10] In January 2010, ING officials lodged a legal challenge against behavioral restrictions that prevent it from being a price leader in those European markets where it has at least a five percent share. Originally accepted as part of INGs restructuring plan, it has since taken the position that the constraints undermine its ability to compete. No decision had been taken at the time of writing.

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level playing field within the banking industry. Third, and perhaps most importantly, the Commission has helped member governments avoid costly subsidy wars. It has done this thorough the consistent, if not always consistently stringent, promotion and application of state aid principles. Second, the Commission accomplished these goals despite the political and resource pressures under which it had to function. The scale and scope of the crisis in the financial sector was unprecedented. Commission officials were under pressure not to get in the way with government efforts to address it, particularly early on. At the same time, governments looked to the Commission to make certain that the behavior of others did not undermine their efforts. This demanded an extraordinary effort on the part of a relatively small staff to process and evaluate the high volume of notifications with which it was faced. Given this context, it is perhaps inevitable that officials were not able to give each notification the attention that they might otherwise have. The broadly positive nature of this assessment notwithstanding, there remain some open challenges. The most troubling of these is the impact the sovereign debt crisis will have on the banking sector. Some of the banks who were most affected by the collapse of asset backed securities and other collateralized debt obligations also find themselves exposed to troubling levels of sovereign debt in their portfolios. EU governments in cooperation with the IMF established a 750 billion bail-out fund as a backstop to calm investor nerve. But market jitters continue. Interbank lending rates are at their highest level since July 2009. And while they remain well below the levels existing in the aftermath of the Lehman collapse, they signal a worrying lack of trust between banks (FT 28 May 2010). As a precaution, several governments including Germany, the Netherlands and Sweden that had been expected to allow their bank guarantee schemes to expire on 30 June as scheduled, now seem likely to seek an extension from the Commission (FT 7 June 2010).34 Concerns that there may be a new round of bank crisis were heightened recently when the Spanish government intervened to prop-up several regional banks. In March 2009, the Bank of Spain seized Caja Castilla La Mancha and just last month took control of CajaSur. (FT 30 March
34

Should they do so, they will find that the Commission has tightened from those that prevailed in the Banking Communication. The Commission explains its approach in a DG Competition Working Document entitle The Application of State Aid Rules to Government Guarantee Schemes Covering Bank Debt to be Issued After 30 June 2010, http://ec.europa.eu/competition/state_aid/studies_reports/phase_out_bank_guarantees.pdf (last accessed on 7 June 2010)

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2009, FT 25 May 2010). Although the cajas share some similarities with Germanys long troubled landesbanken, their troubles are of a different origin (property market crash vs. collapsing CDOs). And because the cajas are smaller, they do not pose the same systemic risk. But the Spanish government is being proactive. It recently established the 99 billion Fondo de Reestructuraction Ordenada Bancaria (Frob) to seize and restructure troubled firms. Signs are that this may not be sufficient as market cassandras seem to have their sights firmly fixed on the Spanish banking sector. Finally, I would like to remark briefly on the methodology adopted in this research project. We frame the project around two sets of claims about the Commissions role in the banking crisis. To substantiate those claims we looked at Community documents, reports in the financial press, and the (rather thin) secondary literature on the crisis. Using evidence drawn from this research we engaged in a combination of inference and counterfactual analysis. The arms length nature of that analysis inevitably (and rightly) gives rise to questions about robustness. In an effort to address these concerns, we will be conducting a battery of interviews with Commission officials, permanent representations, bank representatives and officials in the legal profession. They are scheduled for later this year.

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BIBLIOGRAPHY Adler, Emily, James Kavanagh & Alexander Ugryumov. 2010. State Aid to Banks in the Financial Crisis: The Past and the Future. Journal of European Competition Law & Practice Vol. 1, No. 1: 66-61. Anestis, Paris & Sarah Jordan. 2010. The Handling of State Aid During the Financial Crisis: An Efficient Response or Trouble for the Future? in The European Antitrust Review 2010. London: Law Business Research Ltd. Available at http://www.globalcompetitionreview.com/reviews/19/sections/67/chapters/740/state-aid/ (last accessed 27 May 2010). Blauberger, Michael. 2009. Of Good and Bad Subsidies: European State Aid Control Through Soft and Hard Law, West European Politics 32 (4): 719-737. Buiter, Willem. 2008. The Irish Solution: Unlawful, Beggar-Thy-Neighbour and ShortSighted,but Apart from that OK. Maverecon Financial Times Blog. http://blogs.ft.com/maverecon/2008/10/the-irish-solution-unlawful-beggar-thy-neighbour-andshort-sighted-but-apart-from-that-ok/ (last accessed on 4 June 2010). Cini, Michelle. 2001. The Soft Law Approach: Commission Rule-Making in the EUs State Aid Regime, Journal of European Public Policy 8(2): 192-207. Commission of the European Communities (CEC). 2010. EU State Aid Scoreboard. Report on Recent Developments on Crisis Aid in the Financial Sector (Spring 1010 Update), COM(2010)255 of 27 May 2010. -----. 2008. Communication from the Commission - The Application of State Aid Rules to Measures Taken in Relation to Financial Institutions in the Context of the Current Global Financial Crisis (The Banking Communication), OJ C 270/02 of 25 October 2008. -----. 2008. Communication from the Commission - The Recapitalisation of Financial Institutions in the Current Financial Crisis: Limitation of Aid to the Minimum Necessary and Safeguards Against Undue Distortions of Competition (The Recapitalization Communication), OJ C 10/03 of 15 January 2009. -----. 2009. Communication from the Commission on the Treatment of Impaired Asses in the Community Banking Sector (The Impaired Assets Communication), OJ C 72/01 of 26 March 2009

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-----. 2009. EU State Aid Scoreboard. Special Edition on State Aid Interventions in the Current Financial and Economic Crisis (Spring 2009 Update), COM(2009)164 of 08 April 2009. -----. 2009. Commission Communication on the Return to Viability and the Assessment of Restructuring Measures in the Financial Sector in the Current Crisis Under the State Aid Rules (The Restructuring Communication), OJ C 195/04 of 19 August 2009. -----. 2004. Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty OJ C 244/02 of I January 2004. De Larosiere, Jacques (Chair). 2009. Report from the High Level Group on Financial Supervision in the EU (The De Larosiere Report), 25 February 2009. Della Cananea, Giacinto. 2003. Administration by Guidelines: The Policy Guidelines of the Commission in the Field of State Aids, in Ian Hardin, ed. State Aid: Community Law and Policy. Koln: Bundesanzeiger Verlagsges. Doleys, Thomas. 2009. Fifty Years of Molding Article 87: European Commission and the Development of EU State Aid Law and Policy. Prepared for presentation at Workshop on EU State Aid Policy sponsored by the Centre for Competition Policy (CCP), University of East Anglia, Norwich, England, July 9-10, 2009. -----. 2000. Member States and the European Commission: Theoretical Insights from the New Economics of Organization. Journal of European Public Policy 7(4): 532-553. DSa, Rose. 2009. Instant State Aid law in a Financial Crisis A U-Turn? European State Aid Law Quarterly, No. 2: 139-144. The Economist. Breaking Up, 27 Oct 2009 -----. The Muscles from Brussels, 5 Nov 2009 Economic and Finance Council (ECOFIN). 2008. Immediate responses to the financial turmoil ECOFIN Council Conclusions, 7 October 2008, 13930/08 (Presse 284) Euractiv. 2010. Brussels Seen Delaying Irelands Bad Bank Scheme, 23 February 2010. -----. 2009. EU Expert Group Calls for Tightened Financial Supervision, 26 Feb 09. Council of the European Union. 2008. Presidency Conclusions, 15-16 October 2008, 14368/08
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Franchino, Fabio. 2007. The Powers of the Union: Delegation in the EU. New York: Cambridge University Press. Hall, Matthew. 2009. Competition Law and the Credit Crunch: Do the Usual State Aid Rules Still Apply? PLC, 22 January 2009. Jaeger, Thomas. 2009. How Much Flexibility Do We Need? European State Aid Quarterly, No. 1: 3-5. Kassim, Hussein and Anand Menon. 2003. The Principal-Agent Approach to the Study of the European Union: Promise Unfulfilled? Journal of European Public Policy 10(1): 121-139. Koenig, Chritian. 2008. Instant State Aid Law in a Financial Crisis, State of Emergency or Turmoil? European State Aid Law Quarterly, No. 4: 627-629. Kroes, Neelie. 2009. Time for Banks to Shoulder Their Responsibilities, speech delivered 14 March 2009 (SPEECH/09/117) -----. 2009. Banks Must Reform and Restructure, delivered 23 June 2009 (SPEECH/09/306) -----. 2009. Commission Enforcement Policy and the Need for a Competitive Solution to the Crisis, delivered 17 June 2009 (SPEECH/09/348). -----. 2009. Competition Law in an Economic Crisis, delivered 11 September 2009 (SPEECH/09/385) Majone, Giandomenico. 2001. The Two Logics of Delegation: Agency and Fiduciary Relations in EU Governance. European Union Politics 2(1): 103-122. Pollack, Mark. 2003. The Engines of European Integration: Delegation, Agency and AgendaSetting in the EU. New York: Oxford University Press. -----. 2007. Delegation and Discretion in the European Union, in Hawkins, et al. eds. Delegation and Agency in International Organizations. New York: Cambridge University Press. Rawlinson, Frank. 2003. The Role of Policy Frameworks, Codes and Guidelines in the Control of State Aid, in Ian Hardin, ed. State Aid: Community Law and Policy. Koln: Bundesanzeiger Verlagsges.

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Smith, Mitchell. 1998. Autonomy by the Rules: The European Commission and the Development of State Aid Policy, Journal of Common Market Studies 36:1 (March): 55-78. Tallberg, Jonas. 2002. Delegation to Supranational Institutions: Why, How and With What Consequences? West European Politics 25 (1): 23-46. Warnecke, Stephen. 1978. The European Community and National Subsidy Policies, in Wernecke, ed. International Trade and Industrial Policies. Werner, Phillip & Marina Maier. 2009. Procedure in Crisis? Overview and Assessment of the Commissions State Aid Procedure During the Crisis. European State Aid Law Quarterly, No. 2: 177-186.

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