Luxembourg: Communication on aid to banking sector valid
The Communication from the Commission on aid to the banking sector is valid, the Court of Justice of the European Union (CJEU) has ruled. In particular, burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorisation, by the Commission, of state aid to a bank with a shortfall is not contrary to EU law.
Following the global financial crisis, which began in 2007, the Banka Slovenije (the Bank of Slovenia) determined, in September 2013, that five Slovenian banks were showing capital shortfalls. Given the scale of those shortfalls, those banks did not have sufficient assets to satisfy their creditors and to cover the value of deposits. On 17 December 2013 the Bank of Slovenia adopted a decision putting in place exceptional measures to ensure the recapitalisation of the first two banks, the rescue of the third, and the winding up of the last two banks.
On 18 December 2013 the Commission authorised the granting of state aid to the five banks concerned, that aid having first been notified by the Slovenian authorities. The measures at issue, which were adopted on the basis of the law on the banking sector, included writing off not only equity capital, but also subordinated debt. Subordinated debt is constituted by financial instruments which share certain characteristics with debt products and certain characteristics with equity capital. In the event of the insolvency or winding up of the issuing entity, the holders of subordinated debt are paid after the holders of ordinary debentures, but before equity shareholders. In exchange for the financial risk thus assumed by their holders, those financial instruments offer a higher rate of return.
A number of applications for review of constitutionality of the law on the banking sector having been brought before the Ustavno sodišče (Constitutional Court, Slovenia), that court asked the Court of Justice to give a ruling on the validity and interpretation of provisions of the Banking Communication from the Commission. That communication was adopted in order to provide guidelines on the criteria for the compatibility, with the internal market, of state aid granted to the financial sector in the financial crisis.
In its judgment, the court observed that, with respect to whether the Banking Communication is binding on the member states, the Commission may adopt, in the exercise of its discretion, guidelines in order to establish the criteria on the basis of which it proposes to assess the compatibility, with the internal market, of aid measures envisaged by the member states. In adopting such guidelines and announcing by publishing them that they will apply to the cases to which they relate, the Commission imposes a limit on the exercise of that discretion, with the result that, if a member state notifies the Commission of proposed state aid that complies with those guidelines, the Commission must, as a general rule, authorise that aid.
As regards the burden-sharing by shareholders and subordinated creditors as a prerequisite to the authorisation of state aid by the Commission, the court stated that the Banking Communication was adopted on the basis of a provision of the TFEU to the effect that the Commission may hold to be compatible with the internal market aid designed to remedy a serious disturbance in the economy of a member state.
The burden-sharing measures are designed to ensure that, prior to the grant of any state aid, the banks which show a capital shortfall take steps, with their investors, to reduce that shortfall, specifically by raising equity capital and obtaining a contribution from subordinated creditors, since such measures are likely to limit the amount of the state aid granted.
To act otherwise would be likely to cause distortions of competition, since banks whose shareholders and subordinated creditors had not contributed to the reduction of the capital shortfall would receive state aid of an amount greater than that which would have been sufficient to overcome the residual capital shortfall. Further, in adopting that communication, the Commission did not encroach on the competences conferred on the Council of the European Union.