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
Date: 2008-10-25
Institutions: European Commission
Subjects: State aid, bank, control of State aid, financial market, international finance, monetary crisis

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II

(Information)

INFORMATION FROM EUROPEAN UNION INSTITUTIONS AND BODIES

COMMISSION

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

(2008/C 270/02)

1. INTRODUCTION

1. The global financial crisis has intensified markedly and has
now impacted heavily on the EU banking sector. Over and
above specific problems related in particular to the US
mortgage market and mortgage-backed assets or linked to
losses stemming from excessively risky strategies of indivi-
dual banks, there has been a general erosion of confidence
in the past weeks within the banking sector. The pervasive
individual financial
uncertainty about the credit risk of
institutions has dried up the market of interbank lending
and has consequently made access to liquidity progres-
sively more difficult for financial
institutions across the
board.

2. The current situation threatens the existence of individual
institutions with problems that are a result of
financial
their particular business model or business practices whose
weaknesses are exposed and exacerbated by the crisis in
the financial markets. If such institutions are to be returned
to long-term viability rather than liquidated, a far reaching
restructuring of their operations will be required. Under
the prevailing circumstances,
the crisis equally affects
financial
institutions that are fundamentally sound and
whose difficulties stem exclusively from the general market
to
conditions which have
liquidity. Long-term viability of
these institutions may
require less substantial restructuring. In any case however,
measures taken by a Member State to support (certain)
institutions operating within its national financial market
may favour these institutions to the detriment of others
operating within that Member State or in other Member
States.

severely restricted access

3. The ECOFIN Council on 7 October 2008 adopted Conclu-
to
sions committing to take all necessary measures

enhance the soundness and stability of the banking system
in order to restore confidence and the proper functioning
of the financial sector. The recapitalisation of vulnerable
systemically relevant financial institutions was recognized
as one means, among others, of appropriately protecting
the depositors' interests and the stability of the system. It
was further agreed that public intervention has to be
decided on at national
level but within a coordinated
framework and on the basis of a number of EU common
principles (1). On the same occasion the Commission
offered to shortly issue guidance as to the broad frame-
work within which the State aid compatibility of recapitali-
sation and guarantee schemes, and cases of application of
such schemes, could be rapidly assessed.

4. Given the scale of the crisis, now also endangering funda-
mentally sound banks, the high degree of integration and
interdependence of European financial markets, and the
drastic repercussions of the potential failure of a systemi-
cally relevant financial institution further exacerbating the
crisis, the Commission recognises that Member States may
consider it necessary to adopt appropriate measures to
safeguard the stability of the financial system. Due to the
particular nature of the current problems in the financial

(1) The ECOFIN Council conclusions enumerate the following principles:
— interventions should be timely and the support should in prin-

ciple be temporary,

— Member States will be watchful

taxpayers,

regarding the interests of

— existing shareholders should bear the due consequences of the

intervention,

— Member States should be in a position to bring about a change

of management,

— the management should not retain undue benefits — govern-
ments may have inter alia the power to intervene in remunera-
tion,

— legitimate interest of competitors must be protected, in particular

through the State aid rules,

— negative spill-over effects should be avoided.

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sector such measures may have to extend beyond the stabi-
lisation of
institutions and include
general schemes.

individual

financial

5. While the exceptional circumstances prevailing at

the
moment have to be duly taken into account when
applying the State aid rules to measures addressing the
crisis in the financial markets the Commission has to
ensure that such measures do not generate unnecessary
distortions of competitions between financial institutions
operating in the market or negative spillover effects on
other Member States. It is the purpose of this Communica-
tion to provide guidance on the criteria relevant for the
compatibility with the Treaty of general schemes as well as
individual cases of application of such schemes and ad hoc
cases of systemic relevance. In applying these criteria to
measures taken by Member States, the Commission will
proceed with the swiftness that is necessary to ensure legal
certainty and to restore confidence in financial markets.

2. GENERAL PRINCIPLES

in difficulties

6. State aid to individual undertakings

is
normally assessed under Article 87(3)(c) of the Treaty and
the Community Guidelines on State aid for rescuing and
restructuring firms in difficulty (1) (hereinafter ‘R&R guide-
lines’) which articulate the Commission's understanding of
Article 87(3)(c) of the Treaty for this type of aid. The R&R
guidelines are of general application, while foreseeing
certain specific criteria for the financial sector.

7. In addition, under Article 87(3)(b) of

the Treaty the
Commission may allow State aid ‘to remedy a serious
disturbance in the economy of a Member State’.

8. The Commission reaffirms that, in line with the case law
and its decision making practice (2), Article 87(3)(b) of the
Treaty necessitates a restrictive interpretation of what can
be considered a serious disturbance of a Member State's
economy.

(1) OJ C 244, 1.10.2004, p. 2.
(2) Cf. in principle case Joined Cases T-132/96 and T-143/96 Freistaat
Sachsen and Volkswagen AG v Commission [1999] ECR II-3663, para-
graph 167. Confirmed in Commission Decision 98/490/EC in Case
C 47/96 Crédit Lyonnais (OJ L 221, 8.8.1998, p. 28), point 10.1,
Commission Decision 2005/345/EC in Case C 28/02 Bankgesellschaft
Berlin (OJ L 116, 4.5.2005, p. 1), points 153 et seq. and Commission
Decision 2008/263/EC in Case C 50/06 BAWAG (OJ L 83, 26.3.2008,
p. 7), point 166. See Commission Decision in Case NN 70/07 Northern
Rock (OJ C 43, 16.2.2008, p. 1), Commission Decision in Case
NN 25/08 Rescue aid to WestLB (OJ C 189, 26.7.2008, p. 3), Commis-
sion Decision of 4 June 2008 in Case C 9/08 SachsenLB, not yet
published.

9. In the light of the level of seriousness that the current
crisis in the financial markets has reached and of
its
possible impact on the overall economy of Member States,
the Commission considers that Article 87(3)(b) is, in the
present circumstances, available as a legal basis for aid
measures undertaken to address this systemic crisis. This
applies, in particular, to aid that is granted by way of a
general scheme available to several or all financial institu-
tions in a Member State. Should the Member State's autho-
rities responsible for
financial stability declare to the
Commission that there is a risk of such a serious distur-
bance, this shall be of particular relevance for the Commis-
sion's assessment.

10. Ad hoc interventions by Member States are not excluded in
circumstances fulfilling the criteria of Article 87(3)(b). In
the case of both schemes and ad hoc interventions, while
the assessment of the aid should follow the general princi-
ples laid down in the R&R guidelines adopted pursuant to
Article 87(3)(c) of the Treaty, the current circumstances
may allow the approval of exceptional measures such as
structural emergency interventions, protection of rights of
third parties such as creditors, and rescue measures poten-
tially going beyond 6 months.

11. It needs to be emphasised, however, that the above consid-
erations imply that the use of Article 87(3)(b) cannot be
envisaged as a matter of principle in crisis situations in
other individual sectors in the absence of a comparable
risk that they have an immediate impact on the economy
of a Member State as a whole. As regards the financial
sector, invoking this provision is possible only in genuinely
exceptional circumstances where the entire functioning of
financial markets is jeopardised.

12. Where there is a serious disturbance of a Member State's
recourse to
economy along the lines
Article 87(3)(b) is possible not on an open-ended basis but
only as long as the crisis situation justifies its application.

set out above,

13. This entails the need for all general schemes set up on this
basis, e.g. in the form of a guarantee or recapitalization
scheme, to be reviewed on a regular basis and terminated
as soon as the economic situation of the Member State in
is
question so permits. While acknowledging that
currently impossible to predict the duration of the current
extraordinary problems in the financial markets and that it
may be indispensable in order to restore confidence to
signal that a measure will be extended as long as the crisis
it a necessary
continues,
element for the compatibility of any general scheme that
the Member State carries out a review at least every six
months and reports back to the Commission on the result
of such review.

the Commission considers

it

14. Furthermore, the Commission considers that the treatment
illiquid but otherwise fundamentally sound financial
of
the current exceptional
institutions in the absence of
circumstances should be distinguished from the treatment
characterized by endogenous
of
are
case, viability problems
problems.

institutions
first

financial

In the

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inherently exogenous and have to do with the present
extreme situation in the financial market rather than with
inefficiency or excessive risk-taking. As a result distortions
of competition resulting from schemes supporting the
viability of such institutions will normally be more limited
and require less substantial
restructuring. By contrast,
other financial institutions, likely to be particularly affected
by losses stemming for instance from inefficiencies, poor
asset-liability management or risky strategies, would fit
with the normal framework of rescue aid, and in particular
need a far-reaching restructuring, as well as compensatory
measures to limit distortions of competition (1).
In all
cases, however, in the absence of appropriate safeguards,
distortions of competition may be substantial from the
implementation of guarantee and recapitalization schemes,
as they could unduly favour the beneficiaries to the detri-
ment of their competitors or may aggravate the liquidity
located in other
for
problems
Member States.

institutions

financial

15. Moreover,

in line with the general principles underlying
the State aid rules of the Treaty, which require that the aid
granted does not exceed what
is strictly necessary to
achieve its legitimate purpose and that distortions of
competition are avoided or minimized as far as possible,
and taking due account of the current circumstances, all
general support measures have to be:

— well-targeted in order to be able to achieve effectively
the objective of remedying a serious disturbance in the
economy,

— proportionate to the challenge faced, not going beyond

what is required to attain this effect, and

— designed in such a way as to minimize negative
spill-over effects on competitors, other sectors and
other Member States.

16. The observance of these criteria in compliance with the
State aid rules and the fundamental freedoms enshrined in
the Treaty, including the principle of non-discrimination, is
necessary for the preservation of the proper functioning of
the internal market. In its assessment, the Commission will
take into account the following criteria to decide upon the
compatibility of the State aid measures enumerated below.

3. GUARANTEES COVERING THE LIABILITIES OF FINANCIAL

INSTITUTIONS

17. The principles set out above translate into the following
considerations as regards guarantee schemes protecting
liabilities established by way of a declaration, legislation or
contractual regime, it being understood that these consid-
erations are of a general nature and need to be adapted to
the particular circumstances of every individual case.

(1) It being understood that the exact nature and timing of the restruc-
turing to be carried out may be affected by the present turmoil in the
financial markets.

Eligibility for a guarantee scheme

18. A significant distortion of competition may arise if some
market players are excluded from the benefit of the guar-
antee. The eligibility criteria of financial
institutions for
coverage by such a guarantee must be objective, taking due
account of their role in the relevant banking system and
the overall economy, and non-discriminatory so as to
avoid undue distortive effects on neighbouring markets
and the internal market as a whole. In application of the
principle of non discrimination on the grounds of nation-
institutions incorporated in the Member State
ality, all
concerned,
including subsidiaries, and with significant
activities in that Member State should be covered by the
scheme.

Material scope of a guarantee — types of liabilities covered

19. In the present exceptional circumstances, it may be neces-
sary to reassure depositors with financial institutions that
they will not suffer losses, so as to limit the possibility of
bank runs and undue negative spillover effects on healthy
banks. In principle, therefore, in the context of a systemic
crisis, general guarantees protecting retail deposits (and
debt held by retail clients) can be a legitimate component
of the public policy response.

20. As regards guarantees going beyond retail deposits, the
selection of the types of debt and liabilities covered must
be targeted, to the extent practicable, to the specific source
of difficulties and restricted to what can be considered
necessary to confront the relevant aspects of the current
financial crisis, as they could otherwise delay the necessary
adjustment process and generate harmful moral hazard (2).

21. In the application of

this principle,

the drying-up of
interbank lending due to an erosion of confidence between
financial institutions may also justify guaranteeing certain
types of wholesale deposits
and
medium-term debt instruments, to the extent such liabil-
ities are not already adequately protected by existing
investor arrangements or other means (3).

and even short

22. The extension of the coverage of any guarantee to further
types of debt beyond this relatively broad scope would
require a closer scrutiny as to its justification.

23. Such guarantees should not, in principle, include subordi-
nated debt (tier 2 capital) or an indiscriminate coverage of
all
liabilities, as it would merely tend to safeguard the
interests of shareholders and other risk capital investors. If
such debt is covered, thereby allowing expansion of capital
and thus of lending activity, specific restrictions may be
necessary.

(2) The limitation of the amount of the guarantee available, possibly in
relation to the balance sheet size of the beneficiary may also be an
element safeguarding the proportionality of the scheme in this respect.
(3) Such as, for example, covered bonds and debt and deposits with collat-

eral in government bonds or covered bonds.

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Temporal scope of the guarantee scheme

of

24. The duration and scope of any guarantee scheme going
beyond retail deposit guarantee schemes must be limited
to the minimum necessary. In line with the general princi-
ples set out above, taking into account the currently unpre-
dictable duration of the fundamental shortcomings in the
functioning
the Commission
financial markets,
considers it a necessary element for the compatibility of
any general scheme for the Member State to carry out a
review every six months, covering the justification for the
continued application of the scheme and the potential for
adjustments to deal with evolution in the situation of
financial markets. The results of this review will have to be
submitted to the Commission. Provided that such regular
review is ensured, the approval of the scheme may cover a
period longer than six months and up to two years in
principle. It may be further extended, upon Commission
approval, as long as the crisis in the financial markets so
requires. Should the scheme permit guarantees to continue
to cover the relevant debt until a maturity date later than
the expiry of the issuance period under the scheme, addi-
tional safeguards would be necessary in order to prevent
excessive distortion of competition. Such safeguards may
include a shorter issuance period than that allowed in prin-
ciple under the present communication, deterrent pricing
conditions and appropriate quantitative limits on the debt
covered.

Aid limited to the minimum — private sector contribution

25. In application of the general State aid principle that the
amount and intensity of the aid must be limited to the
strict minimum, Member States have to take appropriate
steps to ensure a significant contribution from the benefi-
ciaries and/or the sector to the cost of the guarantee and,
where the need arises, the cost of State intervention if the
guarantee has to be drawn upon.

26. The exact calculation and composition of such contribu-
tion depends on the particular
circumstances. The
Commission considers that an adequate combination of
some or all of the following elements (1) would satisfy the
requirement of aid being kept to the minimum:

the financial sector at

— the guarantee scheme must be based on an adequate
institutions
remuneration by the beneficiary financial
large (2).
individually and/or
Bearing in mind the difficulty of determining a market
rate for guarantees of this nature and dimension in the
absence of a comparable benchmark, and taking into
account the potential difficulties in the current circum-
the amounts that
stances for beneficiaries to bear
might properly be charged, the fees charged for the
provision of
the scheme should come as close as
possible to what could be considered a market price.
Appropriate pricing mechanisms reflecting the varying

(1) This is a non-exhaustive list of tools contributing to the objective of

keeping the aid to the minimum.

(2) E.g. through an association of private banks.

degree of risks and the beneficiaries' different credit
profiles and needs, will be important contributions to
the proportionality of the measure,

sector

contribution could consist

— if the guarantee has to be activated, a further significant
private
in the
coverage of at
the
incurred by the beneficiary
outstanding liabilities
undertaking (if it continues to exist) or by the sector,
the Member State's
intervention being limited to
amounts exceeding this contribution,

least a considerable part of

— the Commission recognizes that beneficiaries may not
immediately be able to pay an appropriate remunera-
tion in its entirety. Therefore, in order to complement
or partially substitute the preceding elements, Member
States could consider a clawback/better fortunes clause
that would require beneficiaries to pay either an addi-
tional remuneration for the provision of the guarantee
as such (in case it does not have to be activated) or to
reimburse at least a part of any amounts paid by the
Member State under the guarantee (in case it needs to
be drawn upon) as soon as they are in a position to
do so.

Avoidance of undue distortions of competition

27. Given the inherent risks that any guarantee scheme will
entail negative effects on non-beneficiary banks, including
those in other Member States, the system must include
appropriate mechanisms to minimize such distortions and
the potential abuse of the preferential situations of benefi-
ciaries brought about by a State guarantee. Such safe-
guards, which are also important to avoid moral hazard,
should include an adequate combination of some or all of
the following elements (3):

— behavioural constraints ensuring that beneficiary finan-
cial institutions do not engage in aggressive expansion
against the background of the guarantee to the detri-
ment of competitors not covered by such protection.
This can be done, for example by:

— restrictions on commercial

such as
advertising invoking the guaranteed status of the
beneficiary bank, pricing or on business expansion,
e.g. through the introduction of a market share
ceiling (4),

conduct,

— limitations to the size of the balance-sheet of the
beneficiary institutions in relation to an appropriate
benchmark (e.g. gross domestic product or money
market growth (5)),

(3) This is a non-exhaustive list of tools contributing to the objective of

avoiding undue distortions of competition.

(4) The retention of profits in order to ensure adequate recapitalization

could also be an element to be considered in this context.

(5) While safeguarding the availability of credit to the economy notably in

case of recession.

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— the prohibition of conduct that would be irrecon-
cilable with the purpose of the guarantee such as,
for example, share repurchases by beneficiary finan-
the issuance of new stock
institutions or
cial
options for management,

— appropriate provisions that enable the Member State
concerned to enforce these behavioural constraints
removing the guarantee
including the sanction of
protection from a beneficiary financial
institution in
case of non-compliance.

Follow-up by adjustment measures

28. The Commission considers that, in order to avoid distor-
tions of competition to the maximum extent possible, a
general guarantee scheme needs to be seen as a temporary
emergency measure to address the acute symptoms of the
current crisis in financial markets. Such measures cannot,
by definition, represent a fully-fledged response to the root
causes of this crisis linked to structural shortcomings in
the functioning of the organization of financial markets or
to specific problems of individual financial institutions or
to a combination of both.

29. Therefore, a guarantee scheme needs to be accompanied,
in due course, by necessary adjustment measures for the
sector as a whole and/or by the restructuring or liquidation
of individual beneficiaries, in particular for those for which
the guarantee has to be drawn upon.

Application of the scheme to individual cases

30. Where the guarantee scheme has to be called upon for the
institutions it is indispen-
benefit of individual financial
sable that this emergency rescue measure aimed to keep
the insolvent institution afloat, which gives rise to an addi-
tional distortion of competition over and above that
resulting from the general introduction of the scheme, is
the financial
followed up as soon as the situation of
markets so permits, by adequate steps leading to a restruc-
turing or liquidation of the beneficiary. This triggers the
requirement of the notification of a restructuring or liqui-
dation plan for recipients of payments under the guarantee
which will be separately assessed by the Commission as to
its compliance with the State aid rules (1).

31. In the assessment of a restructuring plan, the Commission

will be guided by the requirements:

— to ensure the restoration of long-term viability of the

financial institution in question,

(1) As a matter of principle, the Commission considers that in the event of
payments having to be made to beneficiary financial institution, the
payment has to be followed within six months by a restructuring plan
or a liquidation plan, as the case may be. In order to facilitate the work
of the Member States and the Commission, the Commission will be
prepared to examine grouped notifications of similar restructuring/
liquidation cases. The Commission may consider that there is no need
to submit a plan for the pure liquidation of an institution, or where the
size of the institution is negligible.

— to ensure that aid is kept to the minimum and that
there is substantial private participation to the costs of
the restructuring,

— to safeguard that

there is no undue distortion of
competition and no unjustified benefits deriving from
the activation of the guarantee.

32. In this assessment,

the Commission can build on the
experience gathered in the application of State aid rules to
financial institutions in the past, having regard to the par-
ticular features of a crisis that has reached a dimension to
qualify as a serious disturbance of
the economy of
Member States.

33. The Commission will also take into account the distinction
between aid measures necessitated exclusively by the
current bottleneck in access to liquidity in relation to an
otherwise fundamentally sound financial
institution, as
opposed to assistance provided to beneficiaries that are
additionally suffering from structural solvency problems
linked for instance to their particular business model or
investment strategy. In principle, assistance to the latter
category of beneficiaries is likely to raise greater concerns.

4. RECAPITALISATION OF FINANCIAL INSTITUTIONS

34. A second systemic measure in response to the ongoing
financial crisis would be the establishment of a recapitalisa-
tion scheme which would be used to support financial
institutions that are fundamentally sound but may experi-
ence distress because of extreme conditions in financial
markets. The objective would be to provide public funds
so as to strengthen the capital base of the financial institu-
tions directly or to facilitate the injection of private capital
by other means, so as to prevent negative systemic spil-
lovers.

35. In principle, the above considerations in relation to general
guarantee schemes apply, mutatis mutandis, also to recapita-
lisation schemes. This holds true for:

— objective and non-discriminatory criteria for eligibility,

— the temporal scope of the scheme,

— limitation of the aid to the strict necessary,

— the need for safeguards against possible abuses and
undue distortions of competition, bearing in mind that
the irreversible nature of capital injections entails the
need for provisions in the scheme which allow the
Member State to monitor and enforce the observance
of these safeguards and to take steps avoiding undue
distortions of competition, where appropriate, at a
later stage (2), and

(2) According to the principles of the R&R guidelines.

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— the requirement for recapitalisation as an emergency
measure to support the financial
institution through
the crisis to be followed up by a restructuring plan for
the beneficiary to be separately examined by the
Commission, taking into account both the distinction
between fundamentally sound financial
institutions
solely affected by the current restrictions on access to
liquidity and beneficiaries that are additionally suffering
from more structural solvency problems linked for
instance to their particular business model or invest-
ment strategy and the impact of that distinction on the
extent of the need for restructuring.

36. The particular nature of a recapitalisation measure gives

rise to the following considerations.

37. Eligibility should be based on objective criteria, such as the
need to ensure a sufficient
level of capitalisation with
respect to the solvency requirements that do not lead to
the
unjustified discriminatory treatment. Evaluation of
need for support by the financial supervisory authorities
would be a positive element.

38. The capital

injection must be limited to the minimum
necessary and should not allow the beneficiary to engage
in aggressive commercial strategies or expansion of
its
activities or other purposes that would imply undue distor-
tions of competition. In that context the maintenance of
enhanced minimum solvency requirement levels, and/or
limitation to the total size of the balance sheet of the
financial institution will be evaluated positively. The benefi-
ciaries should contribute as much as possible in the light
of the current crisis through their own means including
private participation (1).

39. Capital interventions in financial institutions must be done
on terms that minimise the amount of the aid. According
to the instrument chosen (e.g. shares, warrants, subordi-
nated capital, …) the Member State concerned should, in
principle, receive rights, the value of which corresponds to
their contribution to the recapitalisation. The issue price of
new shares must be fixed on the basis of a market-oriented
valuation. In order to ensure that the public support is
only given in return for an appropriate counterpart, instru-
ments such as preferred shares with adequate remunera-
tion, will be regarded positively. Alternatively the introduc-
tion of claw-back mechanisms or better fortunes clauses
will have to be considered.

41. The approval of the aid scheme does not exempt Member
States from submitting a report to the Commission on the
use of the scheme every six months and individual plans
for the beneficiary undertakings within 6 months from the
date of the intervention (2).

inherently

42. As in the case of guarantee schemes but having regard to
the
recapitalisation
irreversible nature of
measures, the Commission will carry out its assessment of
such plans in such a way as to ensure the coherence of the
overall results of recapitalisation under the scheme with
those of a recapitalisation measure taken outside such a
scheme according to the principles of the R&R guidelines,
taking into consideration the particular
features of a
systemic crisis in the financial markets.

5. CONTROLLED WINDING-UP OF FINANCIAL INSTITUTIONS

43. In the context of the current financial crisis a Member
State may also wish to carry out a controlled winding-up
of certain financial institutions in its jurisdiction. Such a
controlled liquidation, possibly carried out in conjunction
with a contribution of public funds, may be applied in
individual cases, either as a second step, after rescue aid to
an individual financial
institution when it becomes clear
that the latter cannot be restructured successfully, or in
one single action. Controlled winding-up may also consti-
tute an element of a general guarantee scheme, e.g. where
a Member State undertakes to initiate liquidation of the
financial institutions for which the guarantee needs to be
activated.

44. Again, the assessment of such a scheme and of individual
liquidation measures taken under such a scheme follows
the same lines, mutatis mutandis, as set out above for guar-
antee schemes.

45. The particular nature of a liquidation measure gives rise to

the following considerations.

46. In the context of

liquidation, particular care has to be
taken to minimise moral hazard, notably by excluding
shareholders and possibly certain types of creditors from
receiving the benefit of any aid in the context of
the
controlled winding-up procedure.

side,

40. Similar considerations will apply to other measures and
schemes aimed at tackling the problem from the financial
institutions' asset
that would contribute to the
strengthening of the institutions' capital requirements. In
particular, where a Member State buys or swaps assets this
will have to be done at a valuation which reflects their
underlying risks, with no undue discrimination as to the
sellers.

(1) The upfront provision of a certain contribution may need to be supple-
mented by provisions allowing the imposition of additional contribu-
tions at a later stage.

47. To avoid undue distortions of competition, the liquidation
phase should be limited to the period strictly necessary for
the orderly winding-up. As long as the beneficiary financial
institution continues to operate it should not pursue any
new activities, but merely continue the ongoing ones. The
banking licence should be withdrawn as soon as possible.

(2) In order to facilitate the work of the Member States and the Commis-
sion, the Commission will be prepared to examine grouped notifica-
tions of similar restructuring cases. The Commission may also consider
that there is no need to submit a plan relating to a pure liquidation of
the institution, or where the size of the residual economic activity is
negligible.

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48. In ensuring that the aid amount is kept to the minimum
necessary in view of the objective pursued, it needs to be
taken into account that the protection of financial stability
within the current financial turmoil may imply the neces-
sity to reimburse certain creditors of the liquidated bank
through aid measures. The choice of criteria for the selec-
tion of
liabilities for this purpose should
follow the same rules as in relation to the liabilities
covered by a guarantee scheme.

the types of

49. In order to ensure that no aid is granted to the buyers of
institution or parts of it or to the entities
the financial
sold,
that certain sales conditions are
it
respected. The following criteria will be taken into account
by the Commission when determining the potential exis-
tence of aid:

is important

— the sales process should be open and non-discrimina-

tory,

— the sale should take place on market terms,

— the financial institution or the government, depending
on the structure chosen, should maximise the sales
price for the assets and liabilities involved,

— in case it is necessary to grant an aid to the economic
activity to be sold, this will lead to an individual exami-
nation according to the principles of the R&R guide-
lines.

50. Where the application of these criteria leads to the finding
of aid to buyers or to sold entities, the compatibility of
that aid will have to be assessed separately.

6. PROVISION OF OTHER FORMS OF LIQUIDITY ASSISTANCE

(including funds

51. In dealing with acute liquidity problems of some financial
institutions, Member States may wish to accompany guar-
antees or recapitalisation schemes with complementary
forms of liquidity support, with the provisions of public
funds
from the central bank). The
Commission has already clarified that where a Member
State/central bank reacts to a banking crisis not with selec-
individual banks, but with
tive measures in favour of
general measures open to all comparable market players in
the market (e.g.
lending to the whole market on equal
terms), such general measures are often outside the scope
of the State aid rules and do not need to be notified to the
Commission. The Commission considers for instance that
activities of central banks related to monetary policy, such
as open market operations and standing facilities, are not
caught by the State aid rules. Dedicated support
to a
specific financial
institution may also be found not to
constitute aid in specific circumstances. The Commission

considers (1) that the provision of central banks' funds to
the financial institution in such a case may be found not
to constitute aid when a number of conditions are met,
such as:

— the financial

institution is solvent at the moment of
the liquidity provision and the latter is not part of a
larger aid package,

— the facility is fully secured by collateral to which hair-
cuts are applied, in function of its quality and market
value,

— the central bank charges a penal

interest rate to the

beneficiary,

— the measure is taken at the central bank's own initia-
tive, and in particular is not backed by any counter-
guarantee of the State.

52. The Commission considers that in the current exceptional
circumstances a scheme of liquidity support from public
sources (including the central bank) where it constitutes
aid, can be found compatible, according to the principles
of the R&R guidelines. Provided that the regular review of
such a liquidity scheme every six months is ensured (2), the
approval of the scheme may cover a period longer than six
months and up to two years,
It may be
further extended, upon Commission approval, in the event
that the crisis in the financial markets so requires.

in principle.

7. RAPID TREATMENT OF STATE AID INVESTIGATIONS

that

53. When applying the State aid rules to the measures dealt
takes
with in this Communication in a manner
the
account of prevailing financial market conditions,
in co-operation with the Member States,
Commission,
should ensure both that they achieve their objective and
that the related distortions of competition both within and
between Member States are kept to a minimum. In order
to facilitate this cooperation and to provide both Member
States and third parties with the necessary legal certainty
on the compliance of the measures undertaken with the
Treaty (which is a significant component of restoring
confidence to the markets), it is of paramount importance
that Member States inform the Commission of their inten-
tions and notify plans to introduce such measures as early
and comprehensively as possible and in any event before
the measure is implemented. The Commission has taken
appropriate steps to ensure the swift adoption of decisions
upon complete notification, if necessary within 24 hours
and over a weekend.

(1) See for instance Northern Rock (OJ C 43, 16.2.2008, p. 1).
(2) The principles set out above in point 24 would apply to this review.