The Role of Competition and State Aid Policy in Financial and Monetary Law

Philip Marsden and Ioannis Kokkoris

I. Introduction

During the economic crisis, most governments intervened in markets to support their banking industry on the basis that most of the players were ‘too big to fail’ or at least the sector as a whole was too important to be weakened. Few governments allowed their intervention to be disciplined in any way by competition policy considerations.[1] The urgency and potential for disaster were too great, and the need to act to save a sector on which other industries rely meant that competition policy was relegated to being a distant bystander in the proceedings. This is true even for the European Union (EU), which is unique in actually having the power to direct such interventions by controlling aid from states to private companies. The EU largely rubber-stamped almost all of the interventions made by Member States to support their domestic banking industries.[2]

The special rules for the financial services sector are quite permissive as it is. During this crisis, the European Commission signalled its intention to be pragmatic in the assessment of state aid while the crisis persisted.[3] The Commission has been willing to apply more lenient rules in view of the gravity of the situation such that banks that receive public funds for restructuring may not be required to undertake divestments to the same extent as other undertakings that received aid for the same purpose in the past.4

The statistics reveal that Member States’ notifications of state aid have largely been approved unconditionally.5 As the new rules6 are very lenient, the few cases where the Commission has raised concerns relate to measures that were so complex that the devised solutions could not fit well into any set of EU rules and thus the Commission had to initiate the relevant investigations.

The degree to which the EU ‘bent with the wind’ may make it seem highly unlikely that the EU would be a potential model for designers of an international legal order to control state aid. This would be unfortunate, however, since the very fact that the EU had state aid controls, and could conduct reviews of each national aid programme. Even if the EU’s own disciplinary influence was minor, it still contributed to the ordered release of aid in a transparent manner and with the least anti-competitive outcomes—both important constraints absent in other jurisdictions. As such, this chapter considers how competition policy, in particular the ‘failing firm’ defence in merger control and its state aid policy, is applied to this financial crisis. It begins by describing the most elaborate use of the failing firm arguments during the crisis—that of the UK in the Lloyds/HBOS transaction7— and goes on to examine the use of European state aid provisions to the financial sector.

  • [1] Member States primarily injected capital in banks and raised deposit guarantees to assure thepublic and to prevent runs on banks. For example, UK, Rescue aid to Bradford & Bingley, NN 41/2008;Ireland, Guarantee scheme for banks in Ireland, NN 48/2008; Denmark, Liquidity support scheme forbanks in Denmark, NN 51/2008; Spain, Prolongation for the Fund for the Acquisition of Financial Assetsin Spain, N 337/2009.
  • [2] By 16 December 2009, of the 81 decisions adopted by the European Commission only 6 wereconditional decisions after a formal investigation procedure. Between 2002 and 2007, the amount ofstate aid to industry and services decreased annually by 2 per cent on average (€65 billion). Thefinancial crisis led to an explosion of state aid. Total state aid (excluding railways) granted by theMember States amounted to €279.6 billion in 2008. The level of state aid almost quintupled in 2008compared to 2007 almost exclusively as a result of crisis aid to the financial sector. The Commissionapproved, between October 2008 and October 2009, measures amounting to around €3632 billion.See further Ioannis Kokkoris and Rodrigo Olivares-Caminal, Antitrust Policy Amidst Financial Crises(Cambridge: Cambridge University Press, 2010).
  • [3] The European Commission issued a number of communications related to the assessment of stateaid during the crisis. Communication from the Commission, The application of state aid rules tomeasures taken in relation to financial institutions in the context of the current global financial crisis,OJ 2008 C 270/8 (First Banking Communication); Communication from the Commission, The
 
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