The Official Journal of the European Union has published on January, 15th 2009 the Communication from the Commission on “The recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition”, which presents some guidelines on the new regimes for recapitalization and opens the possibility to adapt the existing ones.

Recapitalisation schemes are one of the key measures that Member States can take to preserve the stability and proper functioning of financial markets. The ECOFIN Council of October, 7th 2008 and the Eurogroup meeting of October, 12th 2008 addressed recapitalisation in a similar spirit by concluding that "Governments commit themselves to provide capital when needed in appropriate volume while favouring by all available means the raising of private capital".

So far, the Commission has approved recapitalisation schemes in three Member States, as well as individual recapitalisation measures, in line with the principles laid down in the Banking Communication. Recapitalisation, notably in the form of ordinary and preferred shares, has been authorized, subject in particular to the introduction of market-oriented remuneration rates, appropriate behavioural safeguards and regular review. However, as the nature, scope and conditions of recapitalisation schemes currently being envisaged vary considerably, both Member States and potential beneficiary institutions have called for more detailed guidance as to whether specific forms of recapitalisation would be acceptable under State aid rules.

The Commission's Communication therefore provides guidance, within Financial-sector specific sector State aid rules, for new recapitalisation schemes and opens the possibility for adjustment of existing recapitalisation schemes.

In the context of the current situation in the financial markets, the recapitalisation of banks can serve a number of objectives:
 

1. Restoration of financial stability and help restore the confidence needed for the recovery of inter-bank lending.
2. Ensure lending to the real economy.
3. Response to the problems of financial institutions facing insolvency as a result of their particular business model or investment strategy.

Competition concerns for recapitalization measures

• Recapitalisation by one Member State of its own banks should not give those banks an undue competitive advantage over banks in other Member States. Access to capital at considerably lower rates than competitors from other Member States, in the absence of an appropriate risk-based justification, may have a substantial impact on the competitive position of a bank in the wider single European market. Excessive aid in one Member State could also prompt a subsidy race among Member States and create difficulties for the economies of Member States which have not introduced recapitalisation schemes. A coherent and coordinated approach to the remuneration of public capital injections, and to the other conditions attached to recapitalisation, is indispensable to the preservation of a level playing field. Unilateral and uncoordinated action in this area may also undermine efforts to restore financial stability.
• Recapitalisation schemes which are open to all banks within a Member State without an appropriate degree of differentiation between beneficiary banks according to their risk profiles may give an undue advantage to distressed or less-performing banks compared to banks which are fundamentally sound and better-performing. This will distort competition on the market, distort incentives, increase moral hazard and weaken the overall competitiveness of European banks.
• Public recapitalisation, in particular its remuneration, should not have the effect of putting banks that do not have recourse to public funding, but seek additional capital on the market, in a significantly less competitive position. A public scheme which crowds out market-based operations will frustrate the return to normal market functioning.

These recommendations come after the recent call from the European Parliament to limit the aid given from public sector to financial institutions and large companies, in order to keep them to the strictly necessary for the maintenance and development of the European economy and should not respond to national interests. The Commission already pointed out, at the moment of the adoption of the recovery plan early November 2008, about the importance to take a common position by Member States when implementing their recovery measures in order keep a balanced response and jointly tackle the economic crisis.