Abstract:
Global financial crisis (2007-2013) put European banking system under constraints. Several countries activated rescue plans for some of their banks under scenarios previously approved by the EU Commission. However, the measure at which banks were affected differed substantially across the EU. On one hand, there were countries characterized by highly concentrated bank sector, significant amount of NPLs and sometimes extensive foreign exposures. On the other hand, other countries experienced only small contractions within the banking sector. There is no doubt that an unreasonable state aid causes market distortions as it undermines banks´ discipline and puts excessive burden on taxpayers. But how can be evaluated public spending under bank rescue plans within a complex reality of banking sector?
This paper examines relationship between main characteristics of country´s banking system and state aid provided during 2007-2020 period. In contrast with previous studies, that mostly link banks failures with low level of core capital or high percentage of NPLs, this study takes different approach. First it finds out the lack of evidence in terms of public aid to banks being influenced by ROE, regulatory capital (expressed as a proportion of RWA), cost-to-income ratio and other characteristics of country´s banking sector. In turn, it states the importance of bank assets, credit, deposits and liquid liabilities as variables with high impact on amount of state aid provided to banks during 2007 – 2020 period. Based on empirical study and statistics regression methods, the paper shows strong influence of variables that reflects size of banking sector compared to much weaker influence of explanatory variables traditionally considered as main drivers of public aid, such as debt and capital based indicators.
Results of this investigation suggest that state aid to banks within EU was determined mainly by magnitude of banking sector and only marginally by the real impact of the financial crisis on banks. Therefore this paper calls for a common definition of state aid to banks, established on sector-wide criteria within EU, instead of individual approach to countries and banks. The author believes that such criteria should be linked to indicators of nonperforming loans, impaired assets and risk weighted cross-border exposures instead of assets, deposits and credit volumes. Update of EU state aid rules would be beneficial in terms of unfair use of state aid as a competition tool among EU countries.
