Commission, October 30, 2008, No N548-08

THE EUROPEAN COMMISSION,

Subject: State aid N548-08 - French Republic

Scheme for refinancing financial institutions

Sir,

1. PROCEDURE

(1) On 28 October 2008 the French authorities notified an aid scheme for refinancing financial institutions in France. The legal basis of the scheme is Article 6 of Law No 2008-1061 of 16 October 2008, Supplementary Finance Act for the financing of the economy.

(2) On the same date, the French authorities sent a number of e-mails to the Commission to clarify certain technical issues.

2. DESCRIPTION OF THE SCHEME

A. Objectives

(3) The notified aid provides for state intervention to establish a refinancing scheme for credit institutions with a view to refinancing the economy and restoring confidence.

(4) The refinancing company for activities of credit institutions (hereinafter: SRAEC) was set up by the Act (1) to provide medium to long-term finance to banks that request it. In the current context of the drying-up of financial markets, SRAEC enables demand for refinancing to be met where it is not satisfied by the short-term mechanisms introduced by the European Central Bank and Eurosystem.

(5) SRAEC, 34% of whose capital is held by the State and 66% by certain banks (2), will issue securities guaranteed by the State and will use these funds to refinance credit institutions authorised in France. In return, the credit institutions will have to pay a fee and give undertakings regarding their conduct in an agreement concluded with the State.

(6) Some €265 billion have been made available for the SRAEC scheme.

B. Beneficiaries

(7) Any credit institution, including the subsidiaries of foreign groups, will be able to benefit from refinancing, providing that they:

- are authorised in France and supervised under the conditions laid down by the Monetary and Financial Code (hereinafter: CMF - code monétaire et financier);

- meet the own funds requirements laid down by the CMF;

- have concluded an agreement with the State setting the consideration provided for by law (3).

(8) The amounts raised by the subscription to the debt instruments issued by SRAEC will be allocated among the different eligible credit institutions that wish to avail themselves, according to the following rule:

- [a large proportion] of the funds raised by SRAEC issues will be allocated to the financing of loans to credit institutions under a formula determined by the size of their balance sheet in France and the amount of their loans outstanding to clients in France.

- Exceptionally, the Government Commissioner may ask the SRAEC Board of Directors for one or more loans to be granted as a priority to a credit institution up to a maximum limit of [...]* of the amount raised by the issue of SRAEC securities on the basis of a reasoned request and provided that specific circumstances make the decision necessary, having regard in particular to the general interest or to the consequences for the applicant credit institution if access to the credit required were refused. However, if this exceptional facility is not used, 100% of the funds raised will be allocated according to the formula referred to above.

(9) The total amount of refinancing that may be granted to a bank may not exceed the higher of the following two amounts: 5% of its balance-sheet total or €500 million. If this threshold is exceeded, the French authorities have undertaken to inform the Commission and notify individual aid.

C. Description

1. Operation of the refinancing procedure

(10) SRAEC will issue securities to raise funds on the financial markets only in line with the requirements of its refinancing operations. Loans granted to banks or securities acquired from banks, or subscribed to by SRAEC, may not have a maturity date later than that of the debt instrument issued by SRAEC to finance the operation.

(11) The state guarantee is granted to debt instruments issued by SRAEC before 31 December 2009 and for a maximum term of five years. Any loans granted by SRAEC and any securities that it might subscribe to or acquire may have a maximum maturity of 5 years.

(12) The French authorities have given an undertaken that the total volume of loans granted or securities subscribed to or acquired by SRAEC with a maturity of more than three years may not exceed [a small proportion] of the total amount outstanding without prior agreement from the Commission. Where the French authorities consider that it is necessary to exceed the threshold, they will request prior authorisation from the Commission. While such authorisation is pending, the scheme will continue to operate but may not exceed the threshold of [...].

2. Refinancing operations

(13) For the purposes of refinancing eligible credit institutions, SRAEC may:

- grant loans to eligible credit institutions;

- subscribe to promissory notes governed by Sections L. 313-43 et seq. of the CMF.

- subscribe to shares or debt instruments issued by the entities referred to by Sections L. 214-42-1 et seq. of the CMF.

(14) The loans granted by SRAEC will be guaranteed by a financial guarantee (4). The financial guarantee will take the form of a pledge of claims that meet the eligibility criteria laid down by law. Where a beneficiary credit institution defaults, SRAEC will call in the financial guarantee and becomes the owner of the claims even if bankruptcy proceedings are opened. It will notify the debtors of the change of ownership of the claims. Guarantees taken out under the CMF may be challenged without formality, realised by offset, appropriation or sale without prior notice.

(15) With regard to any promissory notes (5) to which SRAEC subscribes, its situation will be equivalent to the previous paragraph. The loan is replaced by the promissory note and the financial guarantee by the file procedure provided for by the CMF, which provides that when the promissory note is issued, a pledge is created in favour of the subscriber on a portfolio of mortgage claims belonging to the banker issuing the promissory note. Section L. 313-43 of the CMF requires the banker issuing the promissory note to make available to the bearer of the note, if he so requests, the contracts underlying the refinanced claims with their guarantees, which the issuing bank continues to hold and collect. The issuing bank must keep a list in the name of the bearer of the promissory note that gives details of all the contracts underlying the refinanced claims with their guarantees. The making available of the list to the promissory lender constitutes, without any other formality, the provision of a pledge against the claims and against the mortgage and other guarantees relating to the loans. If the issuing bank defaults, the pledgee lender may obtain the list of the contracts and this grants him ownership of the loans without any other formality.

(16) Lastly, if SRAEC subscribes to or acquires shares or debt instruments issued by the entities referred to in Sections L. 214-42-1 et seq. of the CMF, the result would be the same as for the two preceding provisions, having regard to the requirements imposed by the French authorities. For this type of refinancing, SRAEC will be the sole holder of shares in the securitisation entity whose rules will provide, in accordance with Section L. 214-43 CMF, that SRAEC has the option of asking for the assets held by the securitisation entity to be transferred into its name in the event of the default of a beneficiary bank. Moreover, the securitisation entity's assets will be composed exclusively of claims on the beneficiary credit institutions and of their collateral security subscribed and pledged respectively under the same conditions as those set out under paragraph 14 so that SRAEC will be placed in the same position and have the same rights as for the loan mechanisms described above. The transfer of the loan into the securitisation structure and its establishment are performed at the same time in order to prevent any capital being released in the credit institution assigning the claim.

(17) Consequently, whatever framework is established, SRAEC has the full range of remedies against credit institutions in the event of default; they are not limited in any way to the pledged underlying assets. According to the French authorities, therefore, the beneficiary credit institutions do not benefit at all from the financing transaction by reducing their own funds. The returns from the pledged claims, and the claims themselves, remain the property of the borrowing bank. The bank retains power of disposal. However, the returns form part of the base of the guarantee and, in the event of failure to pay, ownership of the claims, interest thereon, and benefits and guarantees attached to them on the day of default will be transferred (up to the limit of the amount guaranteed). The mechanism is identical for the promissory note and the same result may be obtained within a securitisation structure.

3. Assets guaranteeing SRAEC operations

(18) By way of guarantee of these refinancing operations, SRAEC will receive the financial assets listed in the above law (6). For every refinancing operation of an eligible credit institution, SRAEC will have to value the pledged claims by applying the "haircuts" laid down by a order from the Minister for Economic Affairs (7). The total value obtained after applying the "haircut" for the claims provided as collateral must be at least equal to the loans outstanding against the beneficiary credit institution. The credit institution that has provided the guarantees must replace the receivables whose loan quality of the underlying assets has deteriorated subsequent to it being mobilised.

(19) The 'haircut' ranges from 10-40% depending on the category of assets pledged, in accordance with the provisions laid down in a ministerial order.

(20) The French authorities have pointed out that in order to ensure the quality of the receivables provided as collateral, checks will be carried out by an independent calculation agent at the beneficiary credit institution, at SRAEC and as part of the supervision carried out by the Banking Commission.

(21) If failure to comply with the rule concerning substitution and adjustment of guarantees results in the level of guarantees, duly valued and after application of the haircut, no longer covering the amount of financing obtained from SRAEC, the borrower must repay early that part of the loan not covered by the guarantees in order to return to an adequate level of cover; such compulsory early repayment will incur a fee corresponding to the excess cost incurred for SRAEC for the early repayment. In the case of a transaction involving a promissory note, if the amount of the guarantees proves to be inadequate, the promissory note is returned and a new promissory note is issued for an amount exactly matching that of the guarantees (after the "haircut"); the issuer of the promissory note must then pay the balance to SRAEC. In other words, SRAEC's position remains unchanged, although a different technique is used to take account of how the promissory note functions.

4. Cost of refinancing operations

(22) The state guarantee granted to SRAEC will be for consideration and its cost will be fully passed on to the banks in respect of the refinancing arrangements granted to them. In addition, SRAEC will fully pass on the cost of funds to the beneficiary credit institutions in accordance with the principle of back-to-back financing.

(23) With regard to the cost of funds, the French authorities take the view that the rate of interest will not be equal to that on sovereign debt with the same maturity but be increased by a spread [...] in relation to sovereign debt. The spread arises from the cost of funds established by the French authorities as [...].

(24) With regard to the guarantee, the French authorities have followed the recommendations on state guarantees for bank debt issuance laid down by the ECB Governing Council. For debt with maturity exceeding one year, the guarantee must be priced in relation to the 5-year CDS spread, in accordance with that chosen by France, to which must be added a reduced add-on fee of 20 basis points per annum because the operations have been collateralised.

(25) The CDS component will be determined in line with the following rules:

- if the beneficiary bank had a CDS, the median value of 5-year CDS spreads over the period from 1 January 2007 to 31 August 2008;

- if the beneficiary bank does not have representative CDS, but has a credit rating, the median value of 5-year CDS spreads for the rating category of the beneficiary bank over the period 1 January 2007 to 31 August 2008;

- if the beneficiary bank has neither representative CDS nor a credit rating, the median value of 5-year CDS spreads for the lowest rating category for which there are representative CDS over the period 1 January 2007 to 31 August 2008;

(26) The remuneration must be paid by the banks in one transaction at present value using the interest rate on government bonds that matches the maturity of the issue on the date the loan in question is made available.

5) Behavioural commitments

(27) All beneficiary banks must first make a commitment in an agreement concluded with the State that they will adopt ethical rules consistent with the general interest, which include in particular restrictions on management remuneration and a ceiling on severance pay of two years' remuneration (fixed and variable).

(28) In addition, banks which wish to benefit from refinancing must undertake to ensure that the liquidities provided under the notified scheme will be used to finance the real economy and to prevent distortions of competition between beneficiary banks and other banks. In particular, the objective is to maintain annual growth of 3-4% in the bank's overall amount of loans outstanding to the French economy throughout the period from the date of signature of the agreement and 31 December 2009.

(29) If a bank fails to comply with this agreement, the State may exclude the bank from participating in SRAEC refinancing.

(30) Lastly, the French authorities will ensure that beneficiary banking groups do not engage in aggressive or unfair commercial practices (for example, an advertising campaign in which a credit institution invokes the benefits of the refinancing mechanism).

6) Undertakings given by the French authorities

(31) The French authorities have undertaken to renotify the scheme in the event that the total growth in all the beneficiary banks' balance sheets representing their activities in France exceeds the highest of the following rates, unless the overshoot is not caused by the refinancing scheme itself;

i. the annual rate of growth of French GDP (in value terms) for the previous year;

ii. the historic annual rate of growth of balance sheets in the banking sector in France over the period 1987-2007;

iii. the average rate of growth of balance sheets in the banking sector in the EU over the previous six months.

(32) In the event that the French authorities establish that the rate of growth threshold has been exceeded and that the overshoot is attributable to the refinancing scheme, they will suspend the operation of the scheme without requesting repayment of the refinancing already granted and will send the Commission a notification setting out the causes of the overshoot and any adjustments planned to the scheme in order to draw conclusions. In this event, the scheme will not begin to operate again until after prior authorisation from the Commission.

(33) The French authorities have undertaken to notify an individual aid award if the total amount of refinancing received by a bank exceeds the higher of the following two amounts: 5% of its balance-sheet total or €500 million.

(34) In the event that the State has to provide funds to SRAEC in order to offset the default of a beneficiary bank (by way of the guarantee or a temporary contribution), the French authorities undertake to notify a liquidation plan for the bank or a plan including all the information needed to demonstrate the long-term viability of the bank concerned or the measures required to achieve such viability.

(35) If SRAEC were to make a profit and distribute dividends to its private shareholders, exceeding the de minimis threshold for each shareholder above the normal return on capital invested, the French authorities will inform the Commission and, if necessary, make a formal notification.

6. State intervention while the scheme is being established

(36) The French authorities have also indicated that the State will be authorised by Parliament to intervene directly and in case of emergency in order to guarantee the securities issued by eligible banks in order to set up the refinancing scheme as quickly as possible and without having to wait for SRAEC to be established, which will take several days, or for its initial funds to be raised on the markets, which will take some two weeks from the date on which it is established.

(37) The purpose of this mechanism is not to duplicate the work of SRAEC.

(38) To the extent that this intervention would be carried out under the same terms and conditions as those of SRAEC, the French authorities take the view that any such state intervention should be classified in the same way from a legal perspective.

3. POSITION OF THE FRENCH AUTHORITIES

(39) The French authorities maintain that the indirect guarantee scheme is intended to function as a normal market mechanism, all of whose requirements it must cover. It has been designed to prevent any risk of distortion of competition by virtue of its allocation method, its cost and the commitments regarding their conduct to be given by the beneficiary banks.

(40) The scheme is based on:

- access to the scheme for all banks established and authorised in France, subject to objective and reasoned rules of access concerning the level of own funds;

- an objective allocation formula that is public and designed to be as fair as possible;

- transparent operating rules and issues on the market by SRAEC that all stakeholders can monitor;

- a back-to-back principle, an objective method of calculating remuneration and full allocation of costs to each beneficiary bank without discrimination.

(41) The scheme implies a substantial cost for beneficiary banks in that it involves high fees and an obligation for extensive collateralisation. These two factors are likely to prevent windfall effects. Moreover, in order to take account of the existence of a state guarantee, the remuneration that the banks will have to pay will be increased by an add-on fee that reflects the cost of the guarantee provided by the State to SRAEC. Consequently, the price paid by the banks to benefit from refinancing will be higher than the normal market cost and will include the spread that results from the existence of a state guarantee for SRAEC within the framework laid down by the ECB for government guarantees for securities issues.

(42) Banks that wish to benefit from refinancing will have to conclude an agreement with the State in advance. If the bank does not comply with the agreement, the State may exclude the bank from participating in SRAEC refinancing. The agreement will include a number of behavioural commitments to ensure that the funds provided to the banks by SRAEC will be used to finance the real economy and to prevent distortions of competition between beneficiary banks and others.

(43) Each bank will have to enter into the following commitments, in particular:

- an objective to maintain annual growth of 3-4% in the overall amount of its loans outstanding to the French economy throughout the period from the date of signature of the agreement to 31 December 2009;

- to present a monthly report on the volume and trend in loans: to individuals, distinguishing between consumer loans and housing loans; to businesses, distinguishing between loans to different categories of business; to local authorities;

- to identify ad-hoc solutions to help clients who are having difficulties repaying their bridging loans. In particular, for clients who have not signed a sales agreement, and at the latest three months before the bridging loan matures, the credit institution will carry out a detailed review with its client of their property and financial situation;

- to make the best efforts to finance the investments needs of local authorities. The banks will undertake to participate in the discussions of a body for monitoring loans to local authorities that will meet quarterly under the auspices of the State. The group will identify room for improvement in the practices and relations between banks and local authorities.

(44) Lastly, the French authorities will ensure that beneficiary banking groups do not engage in aggressive or unfair commercial practices (for example, an advertising campaign in which a credit institution were to invoke the benefits of the refinancing mechanism).

(45) The scheme therefore prevents banks in receipt of refinancing from gaining an advantage that might distort competition. Consequently, it does not constitute state aid according to the French authorities.

(46) The French authorities also take the view that the scheme would comply with all the conditions laid down in the Communication of 13 October 2008 on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis. Based on this view, they consider that the Commission could consider the aid scheme as compatible with the EC Treaty and in particular Article 87(3)(b) thereof.

(47) In the notification, the French authorities undertook to carry out study on the implementation of the scheme after six months in order to assess whether it was necessary to maintain the scheme as it stands or adapt it to developments on the financial markets and changes in banks' circumstances. The French authorities promised to report to the Commission on the findings of the study and, if necessary, to notify an extension to the scheme.

(48) The French authorities have undertaken to notify an individual aid if the total amount of refinancing received by a bank exceeds the highest of the two amounts below: 5% of its balance-sheet total or €500 million.

(49) If SRAEC were to make a profit and distribute dividends to its private shareholders, exceeding the de minimis threshold for each shareholder above the normal return (8) on invested capital (9), the French authorities will inform the Commission and, if necessary, make a formal notification.

4. ASSESSMENT

A. Scope of this decision and legality of the scheme

(50) This decision concerns only the mechanism established in relation to SRAEC and in no way addresses the other financial measures in favour of DEXIA that were adopted under the same law. This decision also covers any direct intervention that the State might have to carry out before SRAEC is operational and in line with the arrangements that will apply to SRAEC.

(51) The Commission notes that the French authorities have complied with their obligation under Article 88(3) by notifying the SRAEC scheme before it was implemented.

B. Existence of state aid

(52) Under Article 87(1) of the Treaty, 'any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market.'

(53) The classification of a measure as state aid requires the following cumulative conditions to be met: (1) the measure in question confers an advantage through state resources; (2) the advantage is selective; and (3) the measure distorts or threatens to distort competition and is capable of affecting trade between Member States.

(54) France rejects the classification of the notified scheme as state aid and the Commission must therefore carry out a detailed analysis of the classification.

(55) First, with regard to SRAEC, the Commission notes that SRAEC is the result of a legislative act and that its activity is subject to strict control. A representative of the French State, which is a shareholder, chairs the board of administration. Moreover, under the statutes of this entity, a Government Commissioner attends the meetings of the board of administration and has a right of veto. Moreover, by virtue of the entity's financing structure, all the economic risk attached to the operations carried out by SRAEC are borne in fine by the French State. That is confirmed by the fact that with regard to the return on shares held privately, its profitability reflects the cost of tying up the funds and not the risk return associated with financial activities. Lastly, the Commission notes that the arrangements for collateralising the assets mobilised by the beneficiary credit institutions are laid down in the Order of 20 October 2008 and not by a decision taken by SRAEC. If the beneficiary credit institutions do not comply with their obligations, administrative sanctions may be imposed on them.

(56) The Commission notes that interventions by SRAEC are imputable to the State even though SRAEC is a company constituted under private law, most of whose shares are held privately.

(57) SRAEC will be able to raise funds thanks to a state guarantee. Such a guarantee constitutes state resources within the meaning of Article 87(1) of the EC Treaty.

(58) Second, the Commission notes that the intervention by the French authorities seeks to rectify a shortcoming in the interbank market. Under such circumstances, it is difficult to determine exactly what the market rate would be, but the isolated nature of the operations suggests that the market rates and collateral requirements would undoubtedly be higher than those required by SRAEC. The Commission therefore takes the view that the remuneration for SRAEC operations, although close to market conditions according to the French authorities, constitutes a financial advantage to the extent that the market is unable to provide comparable financing on the same terms. Moreover, the Commission would point out that France had not provided any evidence concerning the situation on the market to justify the objectivity of their argument. Nor can the reference to the ECB recommendations of 20 October 2008 on pricing of government guarantees be adduced to argue that the remuneration of the scheme does not constitute an advantage. The purpose of the recommendations is to ensure consistency between government intervention at European level and not to provide indications as to the level of the current market. Lastly, the Commission notes that the pricing formula proposed by the French State involves averages over a period of 20 months (i.e. CDS) and not the values pertaining when the transaction is effected. To that extent, the behaviour of the French State differs from that of a private investor. This pricing method is likely to favour beneficiary banks by virtue of the current conditions on the CDS market, which are exceptionally good compared with the median value during the reference period. In conclusion, the Commission takes the view that the market cannot be estimated using indicators since tensions on financial markets have recently pushed the market to an historic high.

(59) Third, the notified scheme is not open to all banks, but only to those credit institutions authorised in France that satisfy a number of requirements concerning own funds. The scheme is therefore selective.

(60) Fourth, the position of the undertakings concerned will be strengthened in intra-Community trade and they are active in the supply of loans that are subject to intense competition on domestic and international markets. Since the notified scheme is intended to apply to all credit institutions offering loans, it is likely that the beneficiary banks will account for a substantial share of the banking market in France. The measures are therefore likely to distort competition and affect trade between Member States.

(61) In conclusion, the Commission considers that the case in question meets the cumulative conditions under Article 87(1) of the EC Treaty. The Commission must therefore examine whether the aid is eligible for exemption under Article 87(3) of the EC Treaty.

C. Compatibility of the aid scheme with the common market

(1) Application of Article 87(3)(b) of the EC Treaty

(62) If the Commission were to retain this view of the aid, the French authorities would argue that the notified scheme is compatible by virtue of Article 87(3)(b) of the EC Treaty.

(63) Article 87(3)(b) of the EC Treaty states that: "3. The following may be considered to be compatible with the common market: (b) aid to [...] remedy a serious disturbance in the economy of a Member State."

(64) The Commission takes the view that the aid scheme in this case is open to all credit institutions in France. The Commission does not contest the French authorities' conclusions concerning the critical refinancing situation facing credit institutions resulting from the financial crisis that caused difficulties accessing such operations. The situation also led to a loss of confidence in risk assessment systems, in particular with regard to counterparty debt profiles. The Commission agrees with the French authorities that as long as confidence in the financial system has not been restored and access to refinancing is no easier, the potential effects of such a crisis cannot be limited to the banking sector. Given the sector's key role in the economic system and the scale of the current financial crisis, at the moment there is a systemic risk that could have an impact on the French economy as a whole. The Commission cannot therefore dispute the fact that the notified aid scheme is intended to remedy a serious disturbance in the French economy.

(2) Conditions for aid to be compatible within the meaning of Article 87(3)(b) of the EC Treaty

(65) The compatibility of the aid must be assessed having regard to the Commission Communication on the application of state aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (10) (hereinafter: 'the Communication').

(66) According to the Communication, a measure has to meet all three of the following conditions in order to be compatible with Article 87(3)(b) of the EC Treaty:

(1) The aid must be well targeted. The measures deployed must be suitable to achieve the desired objective, i.e. in this case to remedy a serious disturbance in the economy of a Member State.

(2) The aid must be necessary, i.e. the amount of aid must be limited to the minimum necessary to achieve the desired objective and to the most appropriate means for remedying the disturbance to the economy. In other words, if another aid measure of a lower amount or a lesser distortion of competition (for example a temporary and limited guarantee rather than a capital injection) were sufficient to remedy the disturbance in the economy, the measure cannot be regarded as necessary.

(3) The aid must be proportionate, i.e. the actual or likely distortion of competition must be weighed against its positive effects. Any distortion of competition must therefore be kept to the minimum necessary to achieve the desired effect.

(2) Compatibility of the notified aid within the meaning of Article 87(3)(b) of the EC Treaty

Appropriateness of the measure to achieve the desired objectives

(67) The notified aid is intended, in particular, to prevent serious repercussions of the financial crisis for the French economy. The Commission notes that, to this end, the French authorities have decided to establish a system allowing access to refinancing for any authorised credit institution regardless of size, business plan and field of activities. The transparent rules for allocating the budget between the eligible credit institutions and the rules governing SRAEC ensure that the measure will be applied in a non-discriminatory manner. Moreover, the Commission notes that in return for granting refinancing, the French authorities have asked all beneficiaries to maintain annual growth of 3-4% of their total volume of loans outstanding to the French economy. The effects of the measure should therefore be a similar reduction in the impact of the financial crisis across all sectors of the French economy. However, the Commission notes that there is no differentiated treatment of the different sectors of the economy in relation to this commitment. The French authorities require a commitment concerning the growth of the total volume of credit outstanding rather than a sectoral indicator.

(68) The Commission also notes that the scheme is not open to credit institutions which do not meet the own funds requirements laid down by the CMF. The Commission further notes that the many levels of checks incorporated into the refinancing mechanism minimise the risk that a credit institution which encountered serious difficulties after benefiting from the measure would no longer be able to do so. This finding is supported by the dual commitment given by the French authorities to notify to the Commission any beneficiary which, although meeting the eligibility criteria, obtains asset refinancing under the scheme whose total value exceeds 5% of its balance-sheet total or €500 million, and any direct or indirect call on the state guarantee in favour of SRAEC following the default of a beneficiary. It is clear that in exceptional circumstances there is discretion to override the allocation rules laid down by the French authorities that guarantee transparent allocation of the budget. The scheme provides for the possibility for every issue of securities to favour a credit institution by granting it up to [a low proportion] of the amount raised. Although such a flexibility clause would appear prima facie to be contrary to the principle of non-discrimination underpinning the measure, it is provided with many safeguards. First, the Commission notes that such an event must be justified, having regard to the general interest in the consequences for a credit institution of not obtaining access to the loans required. Even is a credit institution enjoys priority access to refinancing for an issue of securities, the existence of the ceilings of €500 million and 5% of the balance-sheet total limit the total amount that may be allocated to it. These ceilings are an effective safeguard for limiting the French authorities' discretionary power and distortions of competition.

(69) Lastly, as confirmed by the French authorities, the Commission notes that the refinancing mechanism may not result in capital being freed. In particular, the French authorities have argued that even when debt instruments are acquired, the beneficiary credit institution cannot avoid the consequences of a subsequent loss in value of the underlying assets because of the de facto restrictions imposed on the way in which such operations may be accepted. The Commission therefore considers that the scheme in question is intended essentially to facilitate refinancing without directly changing the beneficiaries' own funds requirements.

(70) For all the above reasons, and in line with recent decisions on similar schemes (11), the Commission takes the view that the scheme deals with the relevant aspects of the current financial crisis and that it is well targeted to facilitate the financing of the French economy and to restore confidence. The measures deployed are appropriate to the desired objectives.

Need for the measure

(71) In paragraph 4 of the Communication, the Commission recognised that 'Given the scale of the crisis, now also endangering fundamentally sound banks, the high degree of integration and interdependence of European financial markets, and the drastic repercussions of the potential failure of a systemically relevant financial institution further exacerbating the crisis, the Commission recognises that Member States may consider it necessary to adopt appropriate measures to safeguard the stability of the financial system. Due to the particular nature of the current problems in the financial sector such measures may have to extend beyond the stabilisation of individual financial institutions and include general schemes.'

(72) Moreover, the Commission takes note of the letter from the Governor of the Banque de France dated 20 October 2008 which confirms the presence of systemic risk in France. It also takes note of the declaration made by the eurozone countries on 12 October 2008 proposing that governments make available for an interim period and on appropriate commercial terms, directly or indirectly, a government guarantee, insurance, or other similar arrangements of new medium-term (up to 5 years) bank senior debt issuance. The same declaration also proposes that governments may, for the same purpose, directly acquire the new issues. Depending on domestic market conditions in each country, actions could be targeted at some specific and relevant types of debt issuance.

(73) Against this background, the Commission does not challenge the need to establish such a refinancing scheme. The additional liquidity provided by the scheme will facilitate access to financing for all credit institutions, including those that are fundamentally sound. Moreover, the Commission agrees that such a scheme is capable of boosting the confidence needed for the smooth functioning of the financial system. However, the Commission must ensure that the measure's timeframe and scope are not excessive.

(74) With regard to the timeframe, since the duration of the operations will essentially be less than three years and at most five years, the Commission considers that this timeframe is appropriate and necessary to facilitate a return to normality on the financial markets. The Commission notes the undertaking by the French authorities to limit the operations with a duration of more than three years to a [low proportion] of the amounts raised by SRAEC. Although this duration is longer than that indicated in point 24 of the Communication, given the many safeguards that encourage beneficiaries to find alternative solutions (see point 80), the extra time seems appropriate.

(75) Moreover, the commitment by the French authorities that the present scheme would be in force for six months, renewable, provides another safeguard that the French authorities will not intervene beyond that period.

(76) With regard to the scope of the measure, the Commission looks favourably upon the limitations attached to the conditions imposed on beneficiaries of the scheme. First, the fact that no bad debts or litigious claims can fulfil the eligibility requirements for collateralisation of assets, and that in the event of a default SRAEC has the possibility of exercising full legal remedies that are in no way limited to the underlying assets covered by the guarantee, means that beneficiary credit institutions cannot derive any advantage from the financing operation in terms of reducing own funds.

(77) On the basis of these findings, the Commission takes the view that the scheme is well targeted in order to effectively achieve the objective of remedying a serious disturbance in the economy.

Proportionality of the measure

(78) In order to assess the proportionality of the measure, the Commission must verify that the distortion of competition caused by such state intervention is kept to a minimum, having regard to the risks of a serious disturbance in the economy.

(79) First, the Commission notes that the remuneration charged to the financial institution is based on the cost of funds borne by SRAEC, to which is added the cost of the state guarantee in line with the ECB recommendations (12). However, the add-on fee of 50 basis points is reduced to 20 basis points because the transaction is collateralised. This reduction appears reasonable (13). The economic effort required of beneficiaries therefore seems proportionate to the measure's objective.

(80) Moreover, a number of mechanisms provide an incentive for the beneficiary banks to endeavour to minimise their recourse to the arrangements. First, the requirement that the guarantee be paid in full upfront should encourage beneficiaries to opt for the shortest duration while securing their liquidity needs. Second, the collaterisation arrangement represents an opportunity cost because the assets involved are no longer available but also a management cost due to the requirements built into the system that encourage alternative solutions.

(81) Lastly, the Commission notes that the beneficiary credit institutions will be subject to controls to limit unfair or aggressive commercial practices. These conditions are conducive to reducing the impact of the measures on the competition.

(82) The Commission also welcomes the behavioural constraints that the French authorities have presented. In the event that the threshold is exceeded, the French authorities will suspend the operation of the scheme and notify the Commission should it recommence. That is a safeguard against expansion by beneficiaries. The commitment by the French authorities to submit a liquidation or restructuring plan should the French State have to provide funds to SRAEC is consistent with the requirements set out in footnote 12 to the Communication.

(83) For all the above reasons, the Commission takes the view that the measure is proportionate, having regard to the risks of serious disturbance to the economy.

(84) In exceptional circumstances the French authorities may grant a state guarantee direct to certain credit institutions in order to issue securities as long as SRAEC is not in a position to engage in market operations. Such intervention would take place on the same terms and conditions as apply to SRAEC. The Commission therefore takes the view that the above arguments apply mutatis mutandis to such intervention.

CONCLUSION

The Commission has therefore decided that the notified aid is compatible with the common market by virtue of the exemption provided for in Article 87(3)(b) of the EC Treaty.

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/community_law/state_aids/index.htm.

Your request should be sent by registered letter or fax to:

European Commission

Directorate-General for Competition

State Aid Registry

SPA3 6/5

B-1049 Brussels

Fax No: +32 2 296 12 42

Notes:

1 Section 6(II) of Law No 2008-1061 of 16 October 2008, Supplementary Finance Act for the financing of the economy.

2 The 66% is allocated equally between the following seven groups: Crédit Agricole, BNP Paribas, Société Générale, Caisses d'Épargne, Banques Populaires, HSBC, Crédit Mutuel. The groups account for some 80% of the balance-sheet total of banks established in France.

3 Section 6(II) of Law No 2008-1061 of 16 October 2008, Supplementary Finance Act for the financing of the economy.

* Confidential information.

4 The financial guarantee will be governed by Sections L 431-7-3 et seq. of the CMF. The provisions of the Monetary and Financial Code stem from the transposition into French law of Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (Collateral Directive). It was transposed into French law by Order 2005-171 of 24 February 2005 simplifying the procedures for drawing up and executing financial guarantee contracts.

5 Promissory notes are instruments frequently used by credit institutions for mortgage refinancing. The relevant legislation, which has been developed by the French legislator for some 20 years, is very favourable to the subscriber. The Monetary and Financial Code contains a number of exemptions from the Civil Code to strengthen the guarantees available to the subscriber and which allow him, where necessary, to dispose of or recover full ownership of the pledged assets.

6 Section 6(II)(A) 1-6 of Law No 2008-1061 of 16 October 2008, Supplementary Finance Act for the financing of the economy.

7 Order of 20 October 2008 on the arrangements for providing guarantees for assets mobilised by credit institutions.

8 The benchmark is the yield on government bonds of the same maturity.

9 Shareholders in SRAEC provided an initial capital contribution of [...].

10 OJ C 270, 25.10.2008, p. 8.

11 NN533/08 Support measures for the banking industry in Sweden, NN51/08 Guarantee scheme for banks in Denmark, N507/08 Financial support measures to the Banking Industry in UK, NN48/08 Guarantee scheme for banks in Ireland, N512/08 Rescue package for the financial institutions in Germany, NN60/08 Guarantee scheme for credit institutions in Portugal.

12 Recommendations on government guarantees for bank debt, European Central Bank, 20 October 2008.

13 NN533/08 - Support measures for the banking industry in Sweden.