Ladies and Gentlemen:
I would like to thank Handelsblatt for its kind invitation. This conference is the perfect venue to share my views on the application of EU State aid rules to banks and to the Landesbanken in particular.
Let me start by describing what the EU has done to support the financial system and avoid the collapse of the financial sector since the fall of Lehman Brothers in the fall 2008.
During the last two years and a half the Commission has been working hard to examine and approve emergency rescues swiftly when they were needed; analyse the restructuring plans thereafter; and monitor that the conditions of our decisions were respected.
The governments of the EU have had to commit large amounts of money to keep the financial system afloat and avoid the worst for the economy.
How large was the bill for Europe’s tax payers and therefore for public budgets?
According to our figures, in 2008 and 2009 Member States used about € 2, 340 billion of the support approved1.
I can give you a breakdown of these amounts for 2009, the latest year for which we have detailed figures:
-€ 827 billion in guarantees on bank liabilities,
-€ 141 billion in capital injections,
-€ 110 billion on the relief of impaired assets, and
-€ 29 billion in liquidity and bank funding support.
For a total of about € 1,107 billion.
These subsidies were approved under an emergency State aid regime put in place since October 2008 by the Commission, after discussing it with Member states, to cope with the crisis.
Thanks to this unprecedented effort, Europe’s governments have averted the meltdown, but this does not mean that we can go back to the status quo before the recession.
Our approach is to gradually phase-out the temporary measures so that - market conditions permitting - we can return to the ordinary regime as of 1 January 2012.
Of course, what we have been doing to repair the financial system is not only about public money to support distressed banks.
One of the origins of the crisis was the lack of adequate supervision. The EU institutions, after long debates and the adoption of the De Larosiere report commissioned by the President of the Commission, established a new supervisory system this January. It includes three authorities on insurance and occupational pensions, banking, and securities, as well as the European Systemic Risk Board.
The crisis also showed that banks need both a strong capital base and sustainable funding sources to retain the confidence of the markets.
In this regard, more sustainable business models for banks will be encouraged by the new prudential rules with capital requirements that will insulate banks from future shocks and liquidity ratios that will steer them towards more stable funding sources.
The competent international bodies, under the leadership of the G-20, have taken bold steps in this direction. For instance, the new framework approved by the Basel Committee last December - called Basel III - will make financial systems more robust by increasing the level and quality of the capital buffer of banks.
The crisis has shown, on top of this, the need to find clear answers to fundamental questions; such as effective resolution regimes and a wider contribution of bondholders to cover the losses.
As for the derivatives markets, we have proposed regulation to force the clearing of standard derivatives which - once introduced - should prevent excessive risk-taking and abuse.
We need to move forward in all these domains because - among other things - we need to prevent another financial crisis. To put it in a nutshell, the deregulation era is over.
Public authorities will have to protect the interests of investors, companies and the public without stifling the financial markets.
These reforms will restore confidence in the financial markets and among depositors and will better prepare us to deal with market failures in the future. And in the event of a new crisis, the reforms will help ensure that its cost will not fall only on taxpayers.
Ladies and Gentlemen:
I will now turn to the German banking sector.
The crisis hit hardest where it found weak points. And some of those were here, given the exposure of a number of German banks to toxic assets from the US and weak funding channels.
Germany was one of the few countries in the EU where banks had to be rescued by the government even before the collapse of Lehman Brothers. This was the case with Sachsen LB, IKB, and WestLB.
Sachsen LB received State support in 2007 and early 2008 in the amount of €3.1 billion and was eventually sold to LBBW.
IKB was bailed-out in 2008 and 2009 for €9 billion and later sold to a US private equity firm.
As to WestLB - which is still hitting the headlines - it suffered from turmoil in the financial markets since mid-2007 and has already received taxpayers' money of around €11 billion since 2009, not to count the earlier €5 billion.
The European Commission took more than 20 State aid decisions involving German banks since June 2008, approving the rescue and restructuring of many of them through guarantees on liabilities, recapitalisations, and impaired-asset measures.
How much did Germany pay to rescue its banks in trouble?
To answer this question, I will again use the figures notified to the Commission.
Between 1 October 2008 and the same day in 2010, we approved measures for almost €600 billion. The funds actually used amounted to €192 billion in 2008 and €262 billion in 2009, equivalent to 7.6% and 10.9% of Germany’s GDP for the respective years.
As I did earlier, I would like to give you the detailed figures for 2009:
-€ 212 billion in guarantees on bank liabilities,
-€ 40 billion in capital injections, and
-€ 10 billion for the relief of impaired assets.
This massive public support stabilised Germany’s banking system, but a lot of work remains to be done, especially with some Landesbanken. Another important pending case involves Hypo Real Estate.
A number of Landesbanken were in need of restructuring even before the crisis. But now they must evolve - and this task has become unavoidable and urgent, especially for those under restructuring plans.
Ladies and Gentlemen:
As you know, the discussion between Landesbanken and the European Commission goes back a long time.
We began receiving complaints against the old system of State and municipal guarantees in 1998. These schemes were abolished in 2002.
Since then, we have not been dealing with the Landesbanken sector as such, but rather with some of their members.
Some Landesbanken had managed to adjust to this change, restructured successfully, and have had no need for further help even during the crisis.
This goes to show that not all Landesbanken are tackling the same challenges.
But unfortunately, others have required and received considerable support by public authorities; I am thinking of Sachsen LB, LBBW, WestLB, HSH Nordbank, and BayernLB.
Sachsen and LBBW have in the meantime restructured deeply to restore viability, whereas the discussion with the other three is still open.
I would like to adopt decisions on all pending cases - including the case of Hypo Real Estate and the three Landesbanken - before the summer break.
I will not elaborate in detail about the situation of each one of them. Let me only give you a flavour of where we are right now.
WestLB has to provide a new restructuring plan by the 15th of February. The plan will have to account for all the aid received and explain how the bank intends to achieve long-term viability.
And this task is even more unavoidable and urgent than for other troubled institutions. We simply cannot afford to leave the issue for another day.
The time has come to find a definite and lasting solution to the problems that have been hounding WestLB for a number of years now.
As for the other two banks - BayernLB and HSH Nordbank - we are carrying out our in-depth assessment, after which we will conclude whether their proposals can lead to good business models and restore viability.
How does the Commission conduct these discussions?
First of all - and I want to underline this point - it is important to understand that we do not have a special approach towards Landesbanken. We apply our ordinary competition enforcement goals as we do with other banks that receive State aid. These are:
-preventing and removing competition distortions and
-keeping a level playing field for all operators in the industry.
As Commissioner for competition, my responsibility is to ensure that EU competition rules are enforced impartially and evenly and that each case is assessed on its individual merit.
In our dealings with a number of Landesbanken, our typical concern is that they can stand on their own legs and continue to do business without asking for more public subsidies of any kind.
They need to be able to operate in the new regulatory environment, with more and better-quality capital, and with stable sources of funding - which means putting an end to their overreliance on wholesale markets.
Long-term viability is achieved when a bank is able to cover all its costs and provide an appropriate return on equity, taking into account the bank’s risk profile. Restructured banks should be able to compete in the marketplace for capital on their own merits.
Mergers are often part of restructuring plans; but merging unviable businesses is not a solution in and by itself. The strategy works only when the institution resulting from the merger is solvent and profitable.
This means that we will approve government aid when it allows the banks to restructure and operate according to a viable business model. In contrast, we will not approve subsidies that keep unviable businesses artificially on the market, because that would go to the detriment of competitors and would pose a continued threat to financial stability.
I believe that our control is even more important today than in the past because, as governments struggle to put their finances in order, they must improve the quality of their spending.
In their transition to viable business models, heavily subsidised Landesbanken should free up market shares so that they do not grow to the detriment of unsubsidised competitors on the back of taxpayers’ money.
Ladies and Gentlemen:
Who should share the burden of rescuing and restructuring subsidised Landesbanken?
I believe that institutional shareholders should be held responsible for their mistakes or their reckless risk-taking.
I can see no reason why the burden of restructuring Landesbanken should be transferred wholly onto taxpayers; there must be a rational and fair way to share the burden with shareholders.
Sharing the burden would also affirm a sense of justice. We cannot accept a system that rewards recklessness and punishes prudence. We cannot accept a system that privatises profits and socialises losses.
Sharing the burden would address the moral-hazard issue, because we all agree that we need to send clear signals and build incentives for more prudent behaviour in the future.
The European Commission has already translated these words into facts.
We have a consistent policy that we apply across banking models and Member States. It is our policy to oblige banks and their shareholders to shoulder part of the costs of bailouts and restructuring plans.
In addition, one of the conditions for approving State aid to banks is that taxpayers’ money is not used to pay dividends on shares or interests on hybrid-capital instruments.
I am proud to tell you that - to the best of my knowledge - the Commission is the only authority that implements this policy.
My views are largely consistent with the new German law on the restructuring of financial institutions that entered into force on January 1st.
Among other things, the law provides for the establishment of a new fund paid for by German credit institutions without involving the taxpayer.
The law also provides for the controlled restructuring or winding-down of distressed banks - especially banks with systemic implications - to protect the stability of financial markets.
In light of these new provisions I think that the best time for a root-and-branch restructuring of Landesbanken is now.
The economic situation is propitious too: Germany’s recovery is gaining momentum; the fundamentals are good; and the growth prospects enviable.
Unlike other European countries that are struggling to adjust their economies, Germany has sufficient resources, this brand new legal tool, and a favourable economic environment.
I can see little reason for German banks not to be profitable, and no reason at all to spend taxpayers’ money to keep non-profitable ones alive.
Ladies and Gentlemen:
A lot has been done to put the financial system back on track and the achievements have been remarkable.
In many cases this was due to efforts made by the banks themselves; in others, by government authorities, regulators, and supervisors.
But our gratitude should go above all to taxpayers, whose money was put at risk by those who were at the origin of this crisis.
We can be proud of our achievements so far, but we still have a lot of work to do together.
We at the European Commission will spare no efforts to ensure financial stability, promote a sound and solvent financial system, and remain on the lookout for signs of new financial crises.
These goals are part of our responsibilities on the control of State aid on behalf of European taxpayers, and I am determined to pursue them in close cooperation with the relevant authorities at European and national level.
As to bankers - including the managers of subsidised Landesbanken - they will need to restructure successfully, put in place new business models, and lay the foundations for a viable pillar in Germany’s banking system.
This will be in the best interest of Germany, which needs a robust banking sector to ensure financial stability; sustain the recovery; and lay the foundations for growth farther ahead in time.
And this will be in the best interest of Europe too, which needs a strong and vibrant German economy to reach its social, political, and economic goals.
1 : see Autumn State Aid Scoreboard published on 1 December 2010 ( http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52010DC0701:EN:NOT )