In the aftermath of the global financial crisis of 2007-2008, EU Member States granted vast amounts of state aid to financial institutions in order to preserve financial stability and avoid the collapse of their financial markets. Even though state support to undertakings is in principle prohibited under primary EU Law (Art. 107-109 TFEU), state aid to banks was swiftly approved by the European Commission’s Directorate-General for Competition (DG COMP), including in the form of bailouts. Under Article 107 TFEU, the Commission possesses a large discretion to approve state aid measures, inter alia on the grounds of remedying a serious disturbance in a Member State’s economy. In order to make the exercise of its discretion more predictable, from 2008 to 2013 the Commission issued an array of soft law instruments (communications) detailing the conditions that financial support to banks had to fulfill in order to be approved. Its latest banking communication was adopted in 2013 and has yet to be revised, thus begging the question: are bank-related state aid rules still fit for purpose after more than seven years? 

This debate is highly topical, given the recent (October 2020) publication of a Special Report by the European Court of Auditors (ECA), entitled ‘Control of State aid to financial institutions in the EU: in need of a fitness check’. The purpose of this post is to summarise and critically assess the findings of this Special Report. 

To begin with, the temporal scope of the report needs to be clarified. The European Commission’s Banking Communication was adopted in August 2013. The auditors examined whether, from its adoption until the end of 2018, DG COMP’s state aid control had been up to par and compliant with the EU’s Treaties. Therefore, developments in the past two years, including the coronavirus rescue packages that have flooded the internal market since March 2020 by virtue of the State Aid Temporary Framework, were not examined at all in the report. 

The primary finding of the ECA was that the bank-related state aid rules are generally well-drafted and clear. However, the auditors identified weaknesses in both the Commission’s compatibility assessment and performance monitoring. 

Firstly, in their view, the concept of a ‘serious disturbance’ in a Member State’s economy was not well-defined by the Commission. One could counter that, in its practical application, this concept needs to be at least a bit... nebulous, since, one, the Treaties do not define it either and, two, there needs to be some flexibility in how it is interpreted so that it can be applied to future (unpredictable) crises, such as the coronavirus crisis we are facing today. Secondly, the ECA observed that DG COMP did not rigorously contest Member States’ assertions that the threat to financial stability actually existed in individual cases. In the author’s view, this argument has merit and is substantiated: post-2013, threats to financial stability should perhaps not have been as easily accepted as they had been in the immediate aftermath of the financial crisis. 

The auditors’ third focal point was that, even though the Commission required States to adopt aid measures intended to limit the distortion of competition, it did not properly analyse the actual impacts of each measure on competition. This well-intended criticism goes to the heart of the definition of the concept of state aid, but is perhaps misguided. Under the blessings of the CJEU and following the latter’s jurisprudence constante on this matter since the 1970s, the Commission has never really been required to rigorously analyse an aid measure’s actual impact on competition: this is quasi-automatically assumed. Therefore, the Commission might not be very eager to ‘overburden’ itself when its practice has been sanctioned by the Union’s courts. 

Another important point that the ECA made was that the Commission’s procedures were too lengthy and not always fully transparent, mainly due to the extensive use of informal pre-notification contacts. This is a serious problem, and so is the implicit accusation towards the Commission that is put forward here. This is certainly a point that the Commission should seriously consider formally responding to and possibly working on, together with Member States. 

The final critical remarks of the auditors were aimed at the lack of revisions to the Commission’s banking communication since August 2013. This was found to be problematic for two reasons: one legal and one pragmatic. First, from 2013 to today, banks’ regulatory framework in the EU has been overhauled completely and an almost fully-fledged Banking Union has now emerged. However, the Banking Communication has not been amended, despite the fact that it touched upon key issues covered by, inter alia, the BRRD. Second, the economic climate changed considerably between 2013 and 2018, something that impacted perceived threats to financial stability and their effect on Member States’ economies. Thus, the lack of revisions to the relevant framework might mean that it is no longer aligned with market realities. 

Overall, the ECA’s report is well-researched and thought-provoking. It highlights problems that need to be tackled, as well as issues that are likely to remain unchanged. The auditors’ recommendation is for the Commission to reevaluate existing rules, procedures and practices by the end of 2023. Given that the ECA’s recommendations are very rarely ignored, the Commission’s response is awaited with interest. 

Dimitrios Kyriazis (DPhil, Oxon) is a state aid lawyer and a Research Fellow in Law at the New College of the Humanities.