Introduction the global financial crisis in 2008

Introduction

The ‘Euro Crisis’ has evolved from
the global financial crisis in 2008 with governments supporting their national
banks and bearing the negative consequences. Alongside weakened governments,
other Member States (hereafter MS) suffered from the crisis as their ratings
fell and financial market access became increasingly more difficult.1

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With the emergence of the global
financial crisis, there was no immediate response from the EU Member Sates’ as
the European scale of the crisis was not recognised initially and the response
was purely national to begin with. Banks were bailed out which exacerbate
fragmentation and strained fiscal budgets.2
Over 400 decisions approving state aid measures by the Commission were taken
between October 2008 until December 2012. Temporary rules in the form of six
official communications were moreover added between 2009 and 2013. What
followed, was financial fragmentation along Euro area members which lead to the
impairment of the credit channel and transmission of monetary policy.3

Arising from
the euro crisis and structural glitches of the national banking systems, the
Commission has initiated the creating of a European Banking Union in 2012. The
three pillars of the Banking Union are based upon Article 126(6) of the Treaty
on the Functioning of the European Union (hereafter TFEU), which reads “The Council… may anonymously, and after
consulting the European Parliament and the European Central Bank, confer
specific tasks upon the European Central Bank concerning policies relating to
the prudential supervision of credit institutions…”. The above-mentioned Article was the legal base for the Single Supervisory
Mechanism (hereafter SSM), the Single Resolution Mechanism (hereafter SRM), and
the Common Deposit Guarantee Scheme.4
These developments have been founded on the European Union’s (hereafter EU)
Single Rulebook which comprises the Capital Requirements Directive, the Capital
Requirements Regulation, and the Bank Recovery and Resolution Directive
(hereafter BRRD).5

The financial crisis has put the
European Union into the spotlight and underlined the deficiency of the European
banking structure where none of the Member States had a detached bank
resolution authority and Europe itself had no regime to coordinate bail outs.

It is obvious that the crisis
highlighted the fact that the European banking supervisory structures were
deficient, and that none of the MS had a separate bank resolution authority, nor
was there a European regime to coordinate bail-outs.6
Two cases that demonstrate the difficulty of cross-border coordination of
resolution measures are Dexia and Fortis.

In 2011, Belgium’s second largest
Bank Dexia (now known as Belfius) had been acquired by the Belgian state for €4 billion to preserve financial
stability. At that time, the European Commission was not certain whether EU
state aid rules were violated by this acquisition but acknowledged that the
measure was necessary.7

The
question asked by the Commission was whether the acquisition price constituted
state aid since it was approved in February 2010 that Dexia was to be supported
with a restructuring plan until the end of 2014. Previous support state support
amounting to €6 billion was furthermore paid to Dexia in 2008 by France,
Belgium and Luxembourg.8 Fortis, which was a Belgian financial company present in all three Benelux countries and had planned a join
acquisition of ABN Amro, which resulted to be a rather difficult takeover once
the financial crisis hit in 2008. Fortis was then broken up when it was clear
that its financial issues could not be overcome. Funded by a bailout from the
Benelux governments, Fortis was split; its Belgian Banking operations were sold
to BNP Paribas and its insurance activities were transferred to the Dutch
government and then called ABN Amro.9

These
two examples of Dexia and Fortis both demonstrate the failure of Member States
to successfully stabilise their national financial systems.10
The Banking Union as such is this perceived as an invention to guarantee a more
efficient and coherent application of banking rules within the EU.11
The prudential supervision stemming from a centralised European systems has its
purpose of preventing national aid to ailing banks and to furthermore regulate
this help.12 The financial
crisis has provided for a debatable topic which the result of many theses
focusing on staid aid granted to banks and new developments that have come
about and defined a new field for economic supervision.

This thesis will zoom into the second
pillar of the Banking Union was has come into force on 1 January 2016 and
consists of the Single Resolution Board (hereafter SRB) and the Single Resolution
Fund (hereafter SRF), focusing on the
resolution aspects of the Banking Union regarding the application of state aid
rules through the use of the SRF and the consequences of such application.

The common
resolution scheme, which is perceived as a milestone for the reformation of
insolvent banks within the EU finds itself at the centre of this paper. The
Single Resolution Mechanism is an essential part to the operation of the SSM
completing it by dealing with non-viable banks. Following this approach, ‘being European in life, but national in
death’ shall not be possible anymore.13
With the aim to guard taxpayers’ money, the mandatory bail-in structure of the
SRM foresees to involve shareholders and creditors to avoid using a states’
money to bail out banks. Being a contemporary development, the resolution of
banks at EU level provides for interesting research possibilities.

Structure

This thesis is
divided into four chapters and aims at examining how and for what reasons EU
state aid rules are applicable when support from the SRF is granted. The
consequences of such application are furthermore addressed. The chapters will
deal with the following:

The first chapter will give an insight into the SRM
Regulation and shed light onto the state aid provisions relating to capital
originating from the SRF. This section moreover addresses possible consequences
that may arrive from state aid subject to the SRB and SRF.

In the second chapter, the
focus will be on the criteria under Article 107 TFEU which lays out the use of
state resources to determine how state aid rules interact with national
resolution funds (hereafter ‘NRFs’). The
third chapter will deal with the Banking Communication14
of 2013 and application thereof, as well as BRRD provisions to gain more
insight into the ‘bail-in’ principle. In the second chapter, resolution cases
which were dealt with on a national level fell within the realm of the
Commission, will be examined. The aim of this case analysis is to reveal how it
could be possible to apply state aid rules in the future when the SRF will
employed.

Finally, the fourth Chapter will give
an insight into the current situation and more recent literature surrounding
the topic…

1 Constâncio, V., ‘Banking Union: Meaning and implications for the
future of banking’, The Spanish Review of Financial Economics 13 2015 1-6, p.
2.

2 Abascal, M. et al, ‘A
banking Union for Europe: Making virtue out of necessity, The Spanish Review of
Financial Economics’, Working Paper 14/18 July 2014, p.22.

3 Ibid.

4 Ruffert, M., The Euopean
debpt crisis and European Union Law’, Common Market Law Review 48 2011,
p. 1800.

5 Directive
2013/36/EU, Regulation (EU) No 575/2013 & Regulation (EU) No 575/2013.

6 Metrick,
A., et al, ‘European Banking Union D: Cross Border Resolution – Dexia Group’
(2014).

7 EU Presse Release,
‘State aid: Commission temporarily approves rescue aid for Dexia Bank Belgium;
opens in-depth investigation’ 2011, accessed at: http://europa.eu/rapid/press-release_IP-11-1203_en.htm.

8 Ibid.

9 Kudrna, Z., Working Papar No: 08/2010,
Cross-border resolution of failed banks in the EU: A search for the second
best-best policies’, p.12.

10 Schoenmaker, D., ‘Firmer
foundations for a stronger European Banking Union’, Bruegel Working Paper,
No. 2015/13, p. 4.

11 European Commission Memo, ‘Banking union: restoring financial
stability in the Eurozone’, Brussels, 09 March 2015.

12 Speech by Benoît Coeuré, ‘The
Single Resolution Mechanism: Why it is needed’, 23 May 2013, available at

https://www.ecb.europa.eu/press/key/date/2013/html/sp130523.en.html.

13 European Commission Memo, ‘Banking union: restoring financial
stability in the Eurozone’, Brussels, 09 March 2015, available at http://europa.eu/rapid/press-release_MEMO-14-294_en.htm

14 Communication from the Commission on the application, from 1 August
2013, of State aid rules to support

measures in favour of banks in the
context of the financial crisis (‘Banking Communication’), 2013, OJ C 216.