EU oversight of State aid to banks needs a fitness check

The European Commission has the legal powers and resources to control State aid to financial institutions. However, it had not always been in a position to use them to full effect, according to a new report from the European Court of Auditors (ECA). From 2013 to 2018, there were weaknesses in both compatibility assessment and performance monitoring. In addition, while State aid control rules were generally clear and straightforward, they had not been modified since 2013, despite a very different context. The auditors therefore call for the current rules to be re-evaluated.

Public financial support is generally prohibited under EU law. Following the 2007-2008 financial crisis, however, there was an unprecedented boom in State aid to financial institutions as it was considered necessary to limit the threat that banks posed to financial stability. Since then, the EU has made major reforms to its framework for the financial sector with the aim of rendering future bank bailouts unnecessary. Nonetheless, there are still cases of banks receiving taxpayers’ money. It is the Commission’s task to assess the compatibility of these measures with the EU’s internal market. The auditors looked at whether, from the adoption of the new Banking Communication in August 2013 to the end of 2018, the Commission’s control had been appropriate in ensuring that State aid remained exceptional and limited to the minimum necessary, as required under the EU Treaties.

“Compared to the aftermath of the financial crisis of 2007-2008, the circumstances have clearly changed, even given the unfolding COVID-19 crisis. The regulatory framework has been much strengthened, thus making banks more resilient and decreasing the need for them to rely on taxpayer support. Meanwhile, there is a recognised objective to pursue a more integrated banking sector in the EU”, said Mihails Kozlovs, the Member of the European Court of Auditors responsible for the report. “Therefore we invite the Commission to consider streamlining State aid to the financial sector, in terms of both rules and practices”.

Press Release: EU oversight of State aid to banks needs a fitness check, say auditors