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Moving On: Re-assessing the Role of State Aid in the form of Recapitalisations in the EU Post-BRRD Crisis Management Regime

Opinnäytetyöt 8.5.2018, Gradut ja muut tutkielmat

The 2008 financial crisis led to wide-scale State supported bank rescues. Even if quick reactions were deemed necessary in order to contain systemic risk, these State measures were problematic due to moral hazard. Moral hazard refers to a situation where a risk-taker is protected from the consequences of the risk materialising in a manner which reduces incentives to take appropriate caution. When States took part in rescuing banks during the financial crisis, this meant States in part bore the consequences of banks’ excessive risk-taking. The critical role which the financial system plays in the functioning of society implicitly protects systemically important banks from failing.

In order to reduce the moral hazard problem substantial legal reforms were initiated – including the enforcement of the Banking Recovery and Resolution Directive (2014/59/EU, ”BRRD”) in the EU. The objective of the directive is to harmonise Member States’ resolution and insolvency proceedings regulation frameworks in a manner which safeguards financial stability. It is furthermore stipulated in the directive that the shareholders and unsecured creditors of a bank should be bailed-in prior to tapping into tax-payer money to cover the losses of a distressed institution in times of crisis. Bail-outs, meaning recapitalisation aid granted to banks from State budget funds, can however still be granted in a restricted manner. The extent to which and the channels by which tax-payer money can still be injected to recapitalise banks in the BRRD framework is examined in this research.

State-funded recapitalisations will particularly be assessed from the point of view of effects on competition. A refined economic approach is used as the basis of the effects-analysis. The key findings on competition effects are that static distortions of competition caused by State aid could well be justified on the basis of positive externalities whereas dynamic distortions of competition, such as moral hazard, are more difficult to solve via means of competition policy. Aid measures which are granted in order to correct genuine market failures, such as a credit crunch, constitute an exception. Even in these cases still, in order to limit moral hazard, it should be made sure that any aided bank’s problems are the result of unforeseen exogenous shocks rather than the result of poor internal governance such as lacking risk management. The conclusion is that relying on ex ante crisis management prudential regulation should be the priority means of addressing financial crisis situations. Resorting to State aid ex post would only be possible in well-argumented truly exceptional circumstances in which a suggested aid measure clearly fulfills the conditions of the so-called balancing test.
(Edilex-toimitus)

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• Euroopan unioni - Kriisinratkaisu - Talouspolitiikka - Valtiontuki