3 Issuing costs of state guaranteed bonds - Financial Risk and ...

2 Overview of state guarantee schemes
2.1 Introduction
2 Overview of state guarantee schemes
The intensification of the financial crisis had marked impacts on the EU banking sector, particularly
through 2008Q4. This incited national governments to support financial institutions through a
range of rescue programmes, including state guarantees.
Through this period, the appropriateness of policy responses taken at Member State level were
being weighed, as were the best courses of action for further interventions. The overall conclusion
was to implement a coordinated framework based on a set of EU common principles to guide
national decision-making regarding interventions. 5
The key motivation for using state guarantees was to enhance the soundness and stability of the
banking system, and, overall, to restore confidence and the proper functioning of wholesale
funding markets.
However, other considerations were also taken into account in the design of state guarantees.
Firstly, a distinction was made between financial institutions whose circumstances were due to
general market conditions (of the nature described above) but were fundamentally sound and
those institutions whose pre-existing weaknesses were exposed through the financial crisis.
Specifically, state guarantees were viewed as a suitable intervention for the former group of banks
but not the latter.
Secondly, there was also a preoccupation to ensure, to the extent possible, a level playing field
between banks issuing state guaranteed bonds and other banks, and minimise any competition
distortions that might arise from the granting of state guarantees.
Reflecting these points, state guarantees shifted from the provision of individual guarantees and
moved largely towards generalised schemes. This reflected the systemic scale of the problem and
the need for a system-wide solution. It also took into account the potential for fragmentation of
wholesale funding markets.
Eligibility criteria codified, among other things, the requirement that only solvent banks could take
up a state guarantee.
More generally, the set-up of schemes with predominantly rules-based rather than discretionary
access implied that banks could evaluate whether they wished to participate in state guarantee
schemes or not. It was expected that transparent and fair access would help to minimise any
potential negative competition.
In addition to these specific principles relating to effectiveness, competition issues and market
fragmentation, the general policy approach set out conditions specifying the circumstances in
which state aid would be justified. Broadly, the criteria relate to the evaluation of whether there is
a 'serious disturbance' that would have an immediate impact on the entire economy of a Member
5 Among the key texts highlighting this process are Ecofin Council (2008) and European Commission (2008).
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