Compensating Competitors or Restoring Competition? EC Regulation of State Aid for Banks during the Crisis

We contrast the theory underpinning state aid for failing banks with that for failing firms in the real sector, and find that this should justify a different treatment for banks under Article 107. For example, there is little justification for measures to compensate rivals when the bank has been saved for reasons of systemic stability. We find that the formal guidance on bank restructuring aid takes insufficient notice of this. In four detailed case studies, we also find a number of inconsistencies with respect to size of subsidy, sustainability of divestitures or treatment of mergers. We conclude that while the Commission provided a useful constraint in the midst of a crisis of unprecedented scale and complexity, its approach could have been improved by focusing more closely on the fundamental justification of state aid in each case (i.e. the counterfactual).