The European Commission has published detailed guidance on how Member States can recapitalise banks in the current financial crisis to ensure adequate levels of lending to the rest of the economy and stabilise financial markets whilst avoiding excessive distortions of competition, in line with EU state aid rules. The guidance takes account of the fact that the credit crunch is now beginning to affect the real economy and that financially sound banks may need state capital to ensure an adequate level loans to companies. The Communication complements and refines the broader guidance document adopted on 13 October 2008, to ensure Member States had rapid guidance on the adequate pricing of state capital injections into banks designed to stabilise the banks themselves. The present guidance further addresses the necessity of appropriate safeguards to ensure that the public capital is used to sustain lending to the real economy and not to finance aggressive commercial conduct to the detriment of competitors who manage without state aid. Such safeguards also need to provide incentives for maintaining state intervention in the financial sector only as long as the crisis in the financial markets so requires. This approach ensures fair competition between Member States, fair competition between banks and a return to normal market functioning as soon as possible.

Competition Commissioner Neelie Kroes said: "Rapid and effective intervention by national governments has stabilised the financial system. We now need to look to the real economy. This Communication strikes the right balance between keeping a stable flow of credit to the real economy, stabilising financial markets and preserving a level playing field for banks in Europe. It demonstrates that these objectives can not only be reconciled but are mutually reinforcing. The establishment of a framework that guarantees a consistent approach to state recapitalisation of banks while taking account of a range of different circumstances testifies once more to the Commission's important role in overcoming the current crisis".

The Communication, which takes full account of the recommendations of the European Central Bank and has been discussed with Member States, is based on the same fundamental principle as the 13^th October guidance, namely that state support for banks must not result in recipient banks enjoying an artificially advantageous competitive position compared to banks not receiving aid e.g. in other Member States. The latest Communication complements the 13^th October guidance by distinguishing between banks that are fundamentally sound and receive temporary support to enhance the stability of financial markets and foster undisturbed access to credit for citizens and companies on the one hand, and distressed banks whose business model has brought about a risk of insolvency on the other hand.

State support for distressed banks implies a greater risk of competition distortions, therefore safeguards must be stricter and a thorough restructuring is necessary.

In particular, the Communication establishes principles for the pricing of state capital injections into fundamentally sound banks based on base rates set by central banks to which a risk premium is added that has to reflect the risk profile of each beneficiary bank, the type of capital used and the level of safeguards accompanying the recapitalisation to avoid abuse of the public funding. Riskier banks will have to pay a higher rate of remuneration. The pricing mechanism needs to carry a sufficient incentive to keep the duration of state involvement to a minimum, for example through a remuneration rate that increases over time.

Banks in distress that face a risk of insolvency should in principle be required to pay more for state support and to observe stricter safeguards. The use of state capital for such banks can be accepted only on the condition of a far-reaching restructuring restoring their long-term viability, including where appropriate a change in management and in corporate governance.

Member States have the possibility of creating schemes for recapitalisation that are open to all banks if the rate of remuneration is set at a predetermined level which ensures an appropriate overall return over time.

The Commission will monitor and review the recapitalisation measures taken by Member States. Six months after an individual measure or after the introduction of a recapitalisation scheme, the Member State concerned will report to the Commission on how the state capital has been used. The report must also include an exit strategy for fundamentally sound banks and a restructuring plan for distressed banks.