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European Commission restructure bank guidelines

The European Commission (EC) has restructured the guidelines on banks receiving state aid.

Under the new guidelines, which will be in force until the end of December 2010, banks must be made viable in the long-term without further state support. Bank owners must also carry a fair burden of the restructuring costs.

Furthermore, measures must be taken to limit distortions of competition in the single market.

In an official statement, the EC says these principles will help make the European banking sector viable again.

“State aid can support financial stability in times of systematic crisis, with wider positive spill-overs, it can nevertheless create distortions of competition in various ways,” the document says.

Where banks compete on the merits of their products and services, those taking excessive risk and/or relying on unsustainable business models will ultimately lose market share. They will eventually have to exit the market while more efficient competitors expand or enter the market.

“[However] state aid prolongs past distortions of competition created by excessive risk-taking and unsustainable business models by artificially supporting the market power of beneficiaries,” it says.

State aid programmes for banks had to be restructured as they can create a moral hazard for beneficiaries, while weakening the incentives for non-beneficiaries to compete, invest and innovate.

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