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Competition Policy and Corporate Governance

Explore the EU's comprehensive strategies, financial assistance, and regulatory reforms in response to the financial crisis. Learn about State Aid Rules, State Aid Control, and Corporate Governance requirements for banks.

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Competition Policy and Corporate Governance

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  1. Stockholm 3 December, 2009 Competition Policy and Corporate Governance Humbert Drabbe

  2. The EU’s response: Overview(1/2 ) • When the crisis intensified in October 2008, the EU adopted an immediate, coordinated and comprehensive strategy to prevent a collapse of the financial system • Central banks lowered the borrowing rates for banks • Liquidity support schemes by MS based on state aid guidance • EU fiscal stimulus package: European Recovery Programme, Temporary Framework • Launching of regulatory reform projects • Financial assistance to MS

  3. The EU’s response: Overview(2/ 2) • Now that the economy has weathered the worst, forward-looking initiatives have been launched: • Coordinated stress-testing by CEBS • Regulatory reform • Changes to regulatory treatment of securitisations and hybrid capital • Overhauled rules for Credit Agencies • Systemic Risk Board • Cross-border bank resolution mechanisms • Restructuring of banks in accordance with State aid rules • Preparation of exit strategies (monetary, fiscal & bank support schemes)

  4. State Aid Rules: What are they about? • Selective economic advantage through state resources, affecting competition and intra-EU trade • Purpose: protecting the integrity of the Internal market, avoiding subsidy races • How: balancing test between distortion of competition and trade vs contribution to common interest objectives

  5. The role of State aid control (1/3) • Normally, banks are subject to same rules as other sectors: • Rescue and Restructuring Guidelines • Rescue aid for temporary survival • Restructuring aid to return to long-term viability (without aid) • Restructuring plan • Own contribution • Compensatory measures

  6. The role of State aid control(2/3) • Gravity and scale of current crisis required different approach based on Article 87(3)(b) EC, which allows aid to „remedy a serious disturbance of the economy“ • Restrictive application, only applied twice before • Crisis also threatened fundamentally sound banks • Stability of the entire financial stability in jeopardy • Potential impact on whole economy

  7. The role of State aid control (3/3) • Under this approach measures which would not be allowed under normal rules can be approved • Applicability remains exceptional and limited in time • 4 Guidance papers: • Banking Communication (October, 2008) • Recapitalisation Communication (December, 2008) • Impaired Asset Communication (February, 2009) • Restructuring Communication (August, 2009)

  8. Restructuring Banks • Key issues: • Financial stability • Long term viability • Burden sharing (own contribution, aid limited to minimum) • Distortion of competition Where do corporate governance issues come in?

  9. Where do Corporate Governance issues come in?(1/2) Banking, Recap., Impaired assets Communication: Avoidance of undue distortions of competition, burden sharing • Behavioural constraints to prevent aggressive expansion against non-beneficiary institutions • Prohibition of conduct irreconcilable with purpose of aid measures such as ….issuance of new stock options for managements, unlimited management remuneration, bonuses… • Restrictions on dividend policy

  10. Where do Corporate Governance issues come in?(2/2) Restructuring Communication §11: Restoring long term viability • “The (restructuring) plan should provide information on the business model including in particular its ….corporate governance (demonstrating prevention of conflict of interest as well as necessary management changes) risk management …, and the remuneration incentive structure, demonstrating how it promotes the beneficiary’s long term profitability” • Executive remuneration in line with Commission Recommendation on remuneration policies in the financial sector

  11. Competition Policy and Corporate Governance Corporate Governance Requirements are part of behavioural constraints - to assure return to viability - to limit distortions of competition, and - to achieve an appropriate burden sharing Requirements are identified and assessed on a case by case basis and form part of a wider set of measures to restore viability and address competition concerns No detailed « own » prescriptions, but reliance on existing regulatory and corporate governance rules Appropriate provisions enabling MS to enforce behavioural constraints

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