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New thesis studies conditions for bank aid in the EU

Because of the major importance of banks for the financial system, the European Commission's application of the rules on state aid has become more flexible. But should all banks in financial difficulties receive support? Catrin Karlsson from the Lund University School of Economics and Management, Sweden, has studied this question in her thesis in business law. The results entail both good and bad news for banks.

In her thesis, State aid to the banking sector, Catrin Karlsson argues for a stricter application of the state aid rules for the banking sector. Since the results could have an impact on the EU's imminent reform of the rules on banking aid, the thesis entails both good and bad news for the banking sector.

"Banks that are fundamentally healthy and efficient could find that a stricter application of the rules would have positive consequences because it could lead to the limiting of aid to inefficient banks whose problems stem from their business model or business methods", says Catrin Karlsson.

Against its own guidelines, the European Commission currently approves all aid to banks that face difficulties, regardless of market conditions. The thesis presents a number of conditions that must be fulfilled in order for aid to banks to be approved according to the EU state aid rules. The conditions are based on the Commission's own guidelines.

"Cases that are alike should be treated alike, and cases that differ from each other should be treated differently. If stricter conditions were applied, we could limit the distortion of competition between banks in the EU", says Catrin Karlsson.

The results show that decisions on who should receive aid should be based on the state of the market and the bank in each case, as well as on the nature and necessity of the measures. "In normal market conditions, the possibilities for banks to receive aid should generally be limited", says Catrin Karlsson, adding:

"During a system crisis, it should be more difficult for a small bank with low risk exposure to receive aid. An exception could be made when the bank in question is important for the provision of loans to the regional real economy. In the same way, support to large banks that are suffering as a result of inefficient management with excessive risk taking should be limited."

To support her study, Catrin Karlsson has studied legal sources and ploughed through piles of banking decisions from the European Commission. The results present a systematic model to create better, more targeted state aid for banks. For more information:

Catrin Karlsson, Doctor of Law at the School of Economics and Management, Lund University Mobile: +46 708 357678, Email: catrin.karlsson@busilaw.lu.se Press photograph: http://www.ehl.lu.se/kontakt?uid=bulw-cka

idw :: 07.12.2011