In its decision dated 19 March 2019, the General Court of the EU annulled the Commission’s decision 2016/1208 of 23 December 2015, which had concluded that the support provided by the FITD (Italian Deposit Guarantee Scheme, or ‘DGS’) to one of its members, the regional Italian bank, Tercas, amounted to ‘’aid illegally granted by the Italian State” incompatible with the internal market as under the EU State aid rules as set up under Art. 107 and 108 TFEU, and had ordered Italy to retrieve the money.

According to the General Court, the Commission failed to provide sufficient evidence that Tercas had effectively benefitted from State Aid through a deposit fund guarantee scheme that was not acting independently, but under the control of the State.

The facts of the Bank Tercas case arose prior to the setting up of the Banking Union, in the context of the Global Financial crisis of 2008. Therefore, the EU Commission found itself as the main “de facto” EU resolution authority to carry a significant role in the restructuring and resolution of EU banks.

I.                 Factual background

After an inspection, Banca d’Italia (hereafter, “BI”) recommended the Italian Minister of Finance to put Tercas under special administration in accordance with Art. 70 Italian Banking Law, which was implemented on 30 April 2012. After considering two other offers, the administrator entered into contact with BPB, another regional Italian bank interested in injecting capital into Tercas after a due diligence would be conducted on the assets of Tercas and its subsidiary Banca Caripe, and provided its negative equity would be covered in full by the FITD.

The FITD is an officially recognised deposit guarantee scheme under Directive 94/19/EC of the European Parliament and of the Council, applicable at the time, and Art. 96 of the Italian Banking Act, according to which Italian banks shall be members of a deposit guarantee scheme established and recognised in Italy.  De facto, two exists: the FITD, a mandatory consortium formed under private law, and the Fondo Di Garanzia Dei Depositanti Del Credito Cooperative. Under Article 96 Bis of the Banking Act and Article 29 of the FITD’s Constitution, the FITD may, under certain conditions, take measures to support members that are subject to special administration, measures financed ex post by mandatory contributions provided by the member banks.

On 28 October 2013, the Executive Committee of the FITD decided to support Tercas, for up to EUR 280 million, and the decision was ratified by the FITD’s board on 29 October 2013.

On 27 July 2014, the Tercas shareholders meeting decided to:

• Partially cover the losses inter alia by reducing the capital to zero and cancelling all the ordinary shares in circulation (EUR 265 million as a non-repayable contribution to cover Tercas’ negative equity).
• To increase the capital to EUR 230 million, by issuing new ordinary shares to be offered exclusively to BPB; that capital increase took place on 27 July 2014 and was paid for partly by offsetting a EUR 480 million loan granted to Tercas by BPB on 5 November 2013.

On 1 October 2014, Tercas left special administration and a new management was appointed.

II.               The Commission’s Review and Condemnation of Support to Tercas by the FITD

The Commission learnt through press reports and the websites of the bank Tercas that the FITD had taken measures to support it. It decided on 27 February 2015 to initiate the procedure of formal investigation as under Art. 108(2) TFEU in respect of a suspected unnotified State Aid of EUR 295,14 million, whose compatibility with the internal market should be assessed.

The main measure targeted was the “recapitalisation operation” estimated to EUR 265 million, while the two other measures consisted in guarantees.

Substantial Assessment

A. legality of the aid

In order to assess the existence of state aid, the Commission has to verify and prove that four cumulative conditions are fulfilled following Article 107(1) TFEU:

• A selective advantage conferred on the recipient
• The aid should be granted by a member state or through state resources
• The aid distorts or threatens to distort competition
• The aid should have an effect on inter-state trade.

1.     A selective advantage conferred on the recipient

The classical test used is the “operator in a market economy test”. According to the Commission, Measures 1,2 and 3, as grants of assistance without any associated return, could not be measures that would be taken by a market economy operator. Therefore, it would be for the Member State to provide the Commission with objective and verifiable evidence to show that the decision was based on a prior economic assessment comparable to one that a rational private operator would carry out in a similar situation in order to determine the future profitability of the measure – including a business plan or a calculation of the return on the capital invested, which are fundamental requirements for any investment decision on the part of a private operator. In the case at stake, the Commission concludes the FITD was acting as a body fulfilling a public mandate.

The advantage was selective as such support measures are available only to banks in special administration and on a case by case basis. Here Tercas was the only beneficiary.

Italy objected that the FITD complied with the principle of least onerous financially for its member banks on the basis of the opinion of a reputed consultancy firm. Other interested parties stressed that if in the present case, the obligation to repay deposits up to a certain threshold means that the least measure for member banks is to cover the negative equity, then covering the negative equity is the rational choice from the point of view of a private operator in a market economy.

2.     The aid should be granted by a member state or through state resources

Article 107(1) TFEU encompasses advantages granted by a public or private body. It has to be shown in either case that the state actually exercised control over the undertaking and its resources and was involved in the adoption of the measure.

The Commission tackled the state imputability and control of the resources by the state at once. It found that the support measures taken by the FITD are imputable to the Italian state and FITD’s resources are under public control. When it comes to control of the resources more specifically, the Court referred to case law in the sense that the mere fact that resources are financed by private contributions does not prevent them from being a public character: a measure is imputable to the State and financed through State resources where a set of indicators show that under the national legislation the State exercises control and influence to ensure that the use of the resources of a private body fulfils a public policy objective with which that body is entrusted.  The relevant factor is the degree of intervention of the public authorities in defining those measures and their methods of financing.

In Stardust Marine the Court of Justice held that the imputability to the State of an aid measure taken by a body that was at first glance independent, and did not itself form part of the State, as the body in question could not take the decision allegedly involving State aid without taking account of the instructions or directives of the public authorities. A contrario, In Doux Elevage, the activities of an inter-trade organisation were financed by levies prescribed by law. The Court observed that the objectives pursued in the use of the resources had been determined entirely by the organisation, and that the mandatory nature of the levies was not ‘dependent upon the pursuit of political objectives which are specific, fixed and defined by the public authorities’. The State merely checked the validity and lawfulness of the inter-trade organisations levying of contributions, i.e. the procedural framework, and had no power to influence the administration of the funds. As a result, the Court of Justice held that it could not be concluded that the organisation’s activities were imputable to the State.

The Commission deducts here that it is irrelevant that the FITD is a consortium formed under private law. It ‘’does not necessarily mean’’ that the undertaking could have taken its decision without taking into account the requirements of the public authorities. The autonomy of the undertaking in principle enjoys does not prevent the practical involvement of the state. The prevalence of FITD’s public mandate and BI’s controls over its decision making suffice to establish the FITD’s resources were actually under public control.

• In this regard, the importance of BI’s role in ensuring the stability of the Italian banking system and protecting depositors is reflected in the importance of the control it has over the FITD’s functioning.
• The Commission stresses the constitutional duty of the Italian republic to protect savings in all their forms. The constitutional independence of BI thus is irrelevant as its objectives coincide with that of the State.
• Art 96 Ter Italian Banking Act lists of all the powers exercised by BI with respect to Italian deposit guarantee schemes is preceded by a statement that those powers are to be exercised ‘’having regard to the protection of depositors and the stability of the banking system.’’
• The constitution of the FITD was also approved by BI. When the FITD intervened in cases other than liquidations, or by other means, it always had to have authorisation by the Italian state via the BI.
• The approval which is an administrative decision precedes the entry into force of the measure to be authorised. It is not merely procedural but on merits, with the public mandate in mind. In practice, authorisation has to occur at a stage where the FITD can still reconsider and amend the proposed measure if BI objects to it. The fact that the BI participates as an observer in all meetings of the Board and the Executive Committee of the FITD is material in that connection, as it can be supposed to enable BI to voice any concerns about planned intervention at an early stage.
• In addition to the powers over the FITD thus given to the BI by the Banking Act, only banks under special administration qualify for FITD support measures and this specifically occurs on a proposal from BI, by an order from the ministry of finance.
• The special administrator is actually a public official, who represents the public interest and is appointed and supervised by the BI, which also has the power to recall or replace the special administrator, and to give instructions imposing specific safeguards and limitations on the management of the bank. Intervention on the part of the FITD is thus initiated by a public official under the control of the BI.
• Member banks cannot veto and have to contribute to the funding: hence the decision is imputable to FITD and not its members.
• Ultimately, the public authorities have the formal powers both to request intervention and to approve the substance of the action taken with respect to compliance with the public mandate.
• In conclusion, according to the Commission, in principle and practice, the Italian authorities exercise constant control of compliance in the use of the FITD’s resources with public objectives and influence the use of those resources by the FITD.

Italy’s reply

Italy argued that the measures of support were not of a mandatory nature but purely discretionary, and they served to turn around banks in difficulty. Any coincidence of aims with a public policy mandate – the protection of depositors- is purely fortuitous.

It maintains the independent character of the decision making of the FITD: The representative of the Banca d’Italia being a mere passive observer. The authorisation that has to be granted by BI only intervenes in its capacity of supervising and crisis management authority and is not a political appreciation. The FITD decides itself how to use its resources.

The special administrator acts as the manager and legal representative of the bank in special administration, without power to directly influence the FITD’s decision to grant funding to a bank in difficulty.

Banca d’Italia’s reply

The FITD may intervene in support of a bank placed under special administration only ‘if there are reasonable prospects for recovery and if the costs may be presumed to be less than would be incurred in the event of liquidation’’, which is quite different from Commission’s assertion in the opening decision that that Italy chose to allow its deposit guarantee scheme to intervene ‘to prevent the failure of a credit institution’’.

BI distinguishes the situation at stake from previous cases of state aid measures, where the Commission found that the resources used in measures regarding deposit guarantee schemes were at the disposal of the public authorities and the measures were therefore imputable to the State. All the schemes condemned involved decision-making bodies of the DGS being appointed by the ministry of finance (or that had least had the majority of voting rights) and/or required the ministry to give its approval to act, or the latter could give direct instructions.

Other interested parties (FITD, Bbp and Tercas) refer to the cases Preussen Elektra, Doux élevage and Earl Salvat Pere Et Fils. to put the emphasis that there can be state aid only if the state is present in the decision making bodies of the organisation and is in a position to impose its own decisions.

3.     The aid distorts or threatens to distort competition

The last two criteria were less controversial. This one implies that the position of the relevant company prior to the receipt of the aid has been improved. According to the Commission, the measures distorted competition by preventing Tercas from becoming insolvent and exiting the market as it would have had to do in the absence of such support.

4.     The aid should have an effect on inter-state trade

It is sufficient for the Commission to show that trade might be affected. If aid strenghtens the financial position of an undertaking as compared to others within the EU, then inter union trade will be affected. The relatively small amount of the aid, or size of the recipient undertaking, does not exclude the possibility that EU trade might be affected.

Tercas is in competition with at least one foreign large European financial institution in the region, so that trade between member states is affected.

The Commission thus maintained its conclusion that the measures constituted State aid as within the meaning of 107(1) of the Treaty, granted in breach of the notification and stand still obligations imposed by art 108(3) TFUE.

B.  Compatibility with the internal market

Article 107 TFEU provides for both automatic and discretionary exceptions where the aid may be deemed compatible with the internal market. Among the discretionary exceptions provided under article 107(3), the one relevant here is: ( b) “aid to […] remedy a serious disturbance in the economy of a member state’’.

In the seven Crisis Communications it issued, the Commission has acknowledged that the Global Financial Crisis can create a serious disturbance in the economy of a Member State and that measures to assist banks can be appropriate. Its stance was confirmed in the 2013 Banking Communication, where the Commission lays out the reasons why it considers that the requirements for the application of Article 107(3)(b) TFEU continue to be fulfilled. Measures shall remain appropriate, necessary and appropriate.

In the present case, the Commission examined the aid granted to the applicant in the light of the

• The 2013 Banking Communication (applies to 1 August 2013 onwards).
• The Restructuring Communication
• The Impairment Assets Communication

Measures 1 and 3 do not meet the burden sharing (i.e, bail-in of subordinated bondholders) requirement as in the 2013 Banking Communication, nor do they meet the combined requirements of the Restructuring Communication for the compatibility of restructuring aid, i.e the restoration of long term viability, the limitation of aid to the minimum necessary and measures to limit distortion of competition.

BpB objected that despite the absence of a detailed restructuring plan, an intervention strategy and elements of recovery plan appeared in the business plan 2015-2019.The costs of intervention were further limited by means of burden sharing measures as the share capital was reduced to zero, with the shareholders losing the entirety of their investment. In addition, where possible, the payment of coupons of subordinated bonds was suspended.

The three interested parties submit that the resources for the intervention came entirely from private parties without any added cost to taxpayers.

The absence of a conversion or writing down of subordinated debt was in line with point 45 of the Banking Communication, which allows an exception to the bail-in of subordinated debts where implementing such measures would endanger financial stability or lead to disproportionate results. The FITD could not have required Tercas to impose burden sharing on subordinated creditors beyond the contractual terms of individual loans which provide for write off only in the event of liquidation, and imposing burden sharing on subordinated creditors would have caused legal actions. With a view to reputational and contagion risks, as well as litigation and liquidation costs, not to involve subordinated bondholders was the most reasonable option.

All in all, however, the Commission upheld the final conclusion that the measures provided by the FITD to Tercas constituted State aid that was illegal and incompatible with the internal market. It ordered Italy to retrieve the aid from the beneficiary.

III.           The General Court’s Judgment

As under Article 263 paragraph 4of the TFEU, Italy, BpB and the FITD filed a suit in order to have the Commission’s decision annulled in first instance by the General Court.

Substantial assessment of the Decision by the General Court

Substantive grounds for legal challenges before the CJEU are set out in Article 263 TFEU paragraph 2. Concerning state aids, the CJEU will often make reference to the Commission’s considerable discretion, especially with a view to complex economic assessment and thus overturn such a decision only if the applicant can show a deficiency of reasoning for example, which is what the CJEU found here.

Reviewing the cumulative conditions required by Article 107(1)TFEU for State Aid, the Court indeed deemed that the Commission’s reasoning was flawed as it had not distinguished between the conditions of the “imputability” of the aid to the state, and the State’s control of the resources. Also, the Commission failed to provide sufficient evidence that the aid was attributable to the State (1) and that the funding of the measures had been made through State resources (2).

(1) Imputability

Referring to the Stardust case law, the Court insisted it is necessary to beware of risks of under-inclusion just as much as risks of over-inclusion. In this regard, the Commission’s reasoning could not simply rely on presumptions, alleging that “the absence of influence and effective control of public authorities over this private entity is unlikely”.  It had to demonstrate the concrete and effective influence of the state through indicia derived from the circumstances of the case and the context, all the more since the aid was granted by a private entity. Demonstrating the possibility for the state to exert its influence does not suffice.

The General Court notes that actually, no public authorities would have been in a position to force the FITD to proceed to an intervention if it had not been deemed conformed with the interests of its members, as it requires the unanimous agreement of the members’ representatives. It has a different objective than the refund of deposits and thus, does not constitute the execution of a public mandate.

As for the FITD’s autonomy when adopting the intervention measures, BI has a supervisory power of authorisation, but no means to constrain FITD to intervene to support an ailing bank. The Commission has also failed to prove that the presence of observers from BI in the board meetings allowed it to influence the FITD’s decisions.

(2) Regarding the state control over the resources, the compulsory nature of fees for members of the FITD derives from a decision twice accepted by its members, as their decision to join the FITD allows for such possibility, but also their decisions to accept that such intervention is adopted by the decision making bodies of the consortium. What is more, the intervention is in line with the objectives of the FITD and the interests of its members. The Court found that the argument that it is difficult for banks to dissociate themselves from the FITD in the absence of another DGFS, thus remains theoretical. Therefore, the Commission has failed to show that the resources at stake were controlled by, and at the disposal of, public authorities.

As the General Court did not confirm the reasoning of the Commission in establishing the existence of state aid, the compatibility of the measures with the internal market was therefore not assessed by the GC.

CONCLUSION

If this judgment of the General court is upheld on appeal, this decision should announce a softer interpretation of the EU’s banking rules on handling failing banks by containing a too extensive interpretation of the Stardust doctrine on risks of under-inclusion of state aids (i.e, substance should prevail over form). Thereby, the General Court is calling on the Commission to stick to rigorous standards of proof and avoid a…too formalistic reasoning to demonstrate the substantial elements of state aid despite its private appearances. The ruling in particular is expected have repercussions for the way the Commission treats banking rescues that are ongoing, including those of Italy’s Carige and Germany’s NordLB, as it argued that both could involve illegal state aid because of the involvement of a DGS.

In any case, the institutional frame has changed since the facts of the Tercas case.  Under the Banking Union, the Commission is now one among several EU and national authorities with a saying in the handling of bank restructuration (although, somehow problematically from a coordination point of view, it considers that its 2013 Banking Communication still applies).  Nowadays, competent supervisory authorities must notify resolution authorities without delay where they have determined that an institution meets the condition for early intervention as under art 27(2)BRRD. Under the SRM, the ECB or the national competent authority informs the SRB about any early intervention measure that they require an institution or group to take, and the SRB in turn informs the Commission, which still exerts some control. Early intervention powers however remain discretionary powers of the competent authorities under the BRRD i.e they have no obligation to intervene, while the status of the DGFS when acting in the context of support intervention remains unclear as under the most recent Directive 2014/49, which only mentions in its recitals that the action of DGS should comply with the rules on state aid.

 

Disclaimer: The views described here only engage the author.

Diane de Charette holds an LLM in International Banking and Finance from the University of Edinburgh. She is currently a PhD candidate at the University Paris II – Panthéon Assas on the topic of Transparency in the Banking Union under the supervision of Professors F. Martucci and F. Picod.

For further information: Diane.De-Charette-De-La-Contrie@etudiants.u-paris2.fr