Support for individual borrowers can be indirect State aid to banks.
Introduction
The fact that a public measure has social objectives and aims to help poor households or disadvantaged persons instead of undertakings does not necessarily remove it from the reach of State aid rules. During the past decade, in response to the economic crisis, a number of Member States have tried to support households which fell behind in their mortgage payments. Although the express intention was to assist hard-pressed home owners, banks could indirectly benefit as well. In this situation, the assessment of the compatibility of possible State aid with the internal market can be rather tricky.
In its decision SA.53520, the Commission examined a Greek scheme for the protection of “primary residences”.[1] [A similar Cypriot “first residence scheme” was approved by decision SA.45004 and another Cypriot scheme called “Estia”, which means home, was approved by decision SA.49554].
The purpose of the Greek scheme was to help “vulnerable borrowers” who encountered difficulties in repaying loans that had been secured against their main residences. The scheme would provide grants to eligible borrowers to cover part of the instalments on the loans.
Indeed “non-performing loans” [NPLs] have become a drag on the Greek economy. NPLs are loans whose borrowers fall in arrears. In 2018, they reached 44.5% of all personal loans in Greece and had a total gross value of close to EUR 7.9 billion. The estimated cost of the aid scheme was approximately EUR 2.6 billion (or 1.4% of the Greek GDP in 2018).
Greece considered that the scheme did not involve State aid for the direct beneficiaries because, being households, they could not be classified as undertakings. In case a loan that was secured against the borrower’s residence was in fact a business loan [because the borrower was a self-employed person], then Greek authorities committed to limit the amount of aid to the maximum allowed by the de minimis regulation. They conceded that there could be indirect aid for financial institutions but their position was that such aid was compatible with the internal market under Article 107(2)(a) in the case of individuals and under Article 107(3)(c) in the case of businesses, as was the case with the Cypriot scheme “Estia”.
The scheme does not just subsidise loan instalments. A fundamental requirement of the measure is that lenders accept to restructure the loans. In other words, banks have to accept some losses. From a State aid perspective this makes it difficult to establish whether the banks obtain an advantage. Rather innovatively, the Commission determined the presence of an advantage in the meaning of Article 107(1) TFEU by considering the counterfactual situation.
The reasoning, in very simple terms, is as follows. Let’s say an individual has to pay back a loan of 100, but because he has lost his job he cannot keep up with the loan instalments of 10 per year [the loan has to be repaid in 10 instalments of 10 units each]. The bank can foreclose the loan and try to sell the house that was pledged as collateral. Assume that, as a result of the recession and the drop in house prices, the market value of the house is 58 [as we will see below, the scheme requires that the lender accepts that the notional value of the house is 120% of its current market value (in this example, it would be 69.6)]. Let’s say that the borrower can afford to pay 4 and, under the scheme, he can receive a subsidy of 3, making a total of 7. The bank then can accept to receive 70 instead of 100. It loses 30 in nominal terms, but it is better off by comparison to what it could obtain had it tried to foreclose the loan and sell the house, which is a lengthy and uncertain process, both legally and financially. If the restructuring of the loan yields more for the bank, in comparison to forced sale, it confers an advantage to it because it is made possible by the public subsidy. If the restructuring yields less, then the bank does not accept it and it obtains no advantage.
Eligible loans
Loans from any financial institution are eligible as long as they fulfil all of the following criteria:
- The loan is secured with a mortgage on a property in Greece and is used as a primary residence.
- The value of the property does not exceed EUR 175,000, if the debt also includes business loans, or EUR 250,000 otherwise.
- The total amount of the outstanding principal does not exceed EUR 100,000, including business loans, or EUR 130,000 otherwise.
- Instalments were more than 90 days overdue as of 31 December 2018.
Eligible borrowers
The beneficiaries can be only natural persons who fulfil the following criteria:
- Income does not exceed EUR 12,500 for a single person or EUR 20,000 for couples. The threshold can be increased by EUR 5,000 for each dependent family member up to a maximum of EUR 36,000.
- The value of the property does not exceed EUR 80,000.
- Bank deposits of eligible persons may not exceed EUR 15,000.
Loan restructuring
The scheme requires that loans are restructured as follows:
Individual beneficiaries have to reach an agreement with the creditors to pay 120% of the market value of the primary residence or a total amount of the eligible debts, in case their amount is lower.
The restructured amount has to be paid in monthly equal instalments over a period of 25 years, bearing interest at a rate equal to the three-month Euribor plus 2%.
Contribution by the state
According to the explanation in the Commission decision, “(28) the State’s contribution shall be a percentage of each monthly instalment provided in the settlement plan for each Eligible Debt. Such percentage varies and shall be specified on the basis of the Applicant’s yearly income and family status (i.e. taking into account whether the Applicant has a spouse and/or dependent family members), and shall neither exceed the threshold of 50% nor shall be lower than 30% of the agreed instalment for all Eligible Debts, excluding business loans. In relation to Eligible Debts that are business loans the State’s contribution shall not exceed the threshold of 30% nor shall be lower than 20% (without prejudice to the requirements described in recital (29)) of the monthly instalment provided in the settlement plan for such business loan. Joint Ministerial Decision No. 39100/2019 determines the exact percentage of the State’s contribution to which an Applicant/Eligible Borrower is entitled to, depending on his status.”
“(29) With respect to business loans, the total amount of State contribution will be capped and will not in any case exceed the ceiling of EUR 200,000, which is set as the threshold in the De Minimis Regulation. The foregoing ceiling will be reduced – on a case by case basis – by an amount equal to the aggregate of the de minimis aid measures received by the Applicant during the previous two fiscal years and the current fiscal year so as to ensure that each undertaking benefitting from the Scheme does not receive aid in excess of the de minimis ceiling. In case for any Applicant the de minimis ceiling has been reached by the time of the application said Applicant will not be considered as Eligible Borrower for the purpose of receiving a State contribution. The maximum amount of the de minimis aid an Applicant is entitled to receive will be notified both to the Applicant and the Creditors through the Platform.”
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Existence of State aid
The Commission considered that there were two groups of beneficiaries: the eligible borrowers and financial institutions.
With respect to eligible borrowers, the Commission found that financial support of natural persons was not State aid because they were not undertakings. [paragraph 41 of the decision]
However, “(42) the Scheme also covers natural persons which offer goods and services on the market and can therefore be considered to be undertakings within the meaning of Article 107(1) TFEU. The Commission notes that the maximum State grant (over three years) on the scheme will not exceed EUR 200,000 and therefore will be within de minimis ceiling. Moreover, Greece will ensure that all requirements of the De Minimis Regulation, including cumulation, are complied with. Therefore, as regards natural persons constituting undertakings, the Commission observes that the conditions of the De Minimis Regulation are met and, as a result, the measure at stake is deemed not to have any effect on trade between Member States and not to distort or threaten to distort competition.”
With respect to financial institutions, the Commission’s view was that it could not exclude the possibility that they would benefit from indirect aid.
“(45) In assessing the economic effect of the Scheme on the Financial Institutions, the Commission observes that: (a) If the loans do not turn performing as a result of the Scheme, the situation for the Financial Institutions would not change as compared to the current situation; the institutions would have recourse to the loans’ collateral up to their outstanding nominal amount, including through the foreclosure process.”
“(b) If the loans turn performing as a result of the Scheme, the Financial Institutions will be able to restart collecting cash-flows, as long as the borrowers do not re-default, up to the loans’ restructured nominal amount. This amount may be lower than the outstanding nominal amount, if the latter is higher than the 120% of collateral’s market value, i.e. if the loan’s equity is negative.”
“(46) The Scheme would then have two opposite effects on the Financial Institutions: (a) On the one hand, the State subsidy will help the defaulted borrower to restart paying the restructured loans to the Financial Institutions. This entails a positive economic effect for the Financial Institutions as long as the loans’ restructured nominal amount is higher than the potential proceeds from the banks’ recourse to the loans’ collateral, including through the foreclosure process, under the current loans’ terms.”
“(b) On the other hand, the Financial Institutions may give up the potential repayment of more than the restructured amount of the mortgage achieved through other means as long as the restructured nominal amount is lower than the outstanding nominal amount.”
“(47) To the extent that the Scheme is effective in improving the perspectives of the Financial Institutions to turn the NPLs into performing loans, it is a reasonable assumption that the positive effect (of recovering a value higher than the proceeds from the recourse to the loans’ collateral and up to the restructured nominal amount) would tend to prevail over the negative effect (of giving up a potential upside above the restructured nominal amount and up to the outstanding nominal amount).”
“(48) In conclusion, it cannot be excluded that the Financial Institutions indirectly benefit from the Scheme and its embedded subsidies.”
As the advantage was selective, was conferred through state resources and had the potential to affect trade and distort competition, the scheme involved State aid for financial institutions.
Scope and criteria for assessing the compatibility
“(54) With respect to the different groups of Eligible Borrowers, the compatibility of the indirect aid to the Financial Institutions will be assessed under two distinct legal bases. More specifically, with regard to natural persons (not constituting undertakings) as final beneficiaries, Article 107(2)(a) TFEU constitutes the compatibility basis. However, with regard to natural persons constituting undertakings within the meaning of Article 107(1) TFEU as final beneficiaries, Article 107(3)(c) TFEU serves as the applicable compatibility basis. For the avoidance of doubt, the indirect aid to the Financial Institutions will not be assessed under Article 107(3)(b) TFEU, which is the legal basis under which the Commission has been consistently assessing any restructuring or liquidation aid to financial institutions since the beginning of the financial crisis. Therefore, the detailing the compatibility assessment under Article 107(3)(b) TFEU are not applicable.”
“(55)With respect to the indirect aid to Financial Institutions flowing from the support to natural persons (not constituting undertakings), it can benefit from the exception on aid having a social character as laid down on Article107(2)(a) TFEU.”
“(62) The Commission assesses the measure directly under Article 107(3)(c) TFEU following the common assessment principles relevant to this particular case. In particular, it has to analyse whether the measure contributes to a well-defined objective of common interest, whether it is appropriate with respect to the aim it desires to achieve, whether the measure is necessary and whether it is proportionate.”
“(63) With regard to the objective of common interest, the Scheme aims at avoiding the foreclosure of small entrepreneurs from the house in which they live. Without it, the activation of foreclosure proceedings would likely involve serious hardships, as these entrepreneurs would be evicted from their homes. Thus, the aid pursues an objective of common interest which consists in addressing the social hardships particular to the vulnerabilities faced by small entrepreneurs.”
“(64) With regard to the appropriateness of the Scheme, the measure is suitably designed to achieve the objective of common interest, since the State will pay part of the monthly instalment due by the entrepreneurs to the Financial Institution, such that the institution does not proceed with foreclosure and seize up the residence of the entrepreneurs. Hence, the Scheme seems well-targeted and appropriate for the intended objective. The Scheme is designed in such a way as to alleviate the current risks of foreclosure faced by small entrepreneurs. The Commission notes in this respect that the Eligibility Criteria take into account the income and wealth of the borrower’s household.”
“(65) With regard to the necessity of the Scheme, its criteria are designed so as to target vulnerable natural persons offering products or services in the market (and are therefore considered undertakings) only and, thus, it avoids targeting the entire stock of existing NPLs held by Greek Financial Institutions. In addition, the Scheme is limited to payments of part of the monthly instalment; the Financial Institutions will continue to bear the credit risk vis-à-vis such loans, for the amount of the loan still outstanding post-restructuring. This means that the risk of default is not eliminated by the Scheme.”
“(66) With regard to the proportionality of the Scheme, the measure seems to be limited to what is necessary to achieve the objective pursued. The aid cannot generate unnecessary advantages to the Financial Institutions and hence cannot generate undue distortion of competition. Greece has estimated a budget for the grant available under the Scheme of ca. EUR 132 million per year over an expected average re-payment period for the restructured loans of 20 years. The Eligible Loans would amount to a total of up to EUR 7.9 billion, i.e. 10.2% of the Greek banks’ total NPLs, or 2.7% of total assets as of end of 2018. The amount of NPLs eventually subject to the subsidy can be reduced by the borrowers’ participation rate and the application of the Eligibility Criteria.”
“(67) In view of the above, with respect to undertakings, the indirect aid to the Financial Institutions through the de minimis aid to the undertakings is compatible under Article 107(3)(c) TFEU.”
Violation of the directive on banking recovery and resolution?
Then the Commission examined whether the aid violated any other, “intrinsically linked” provisions of EU law.
“(68) It has been established that the Scheme provides indirectly aid to the Financial Institutions. To the extent that some Financial Institutions, notably the banks, fall under the scope of Directive 2014/59/EU, as defined in Article 1, it needs to be assessed whether such aid qualifies as “extraordinary public financial support”, as defined pursuant to Article 2(28).”
“(69) This is necessary because the Commission cannot approve aid as compatible with the internal market if it breaches another intrinsically linked provision of Union law.”
“(70) Article 2(28) of the Directive defines extraordinary public financial support as: “State aid within the meaning of Article 107(1) TFEU, or any other public financial support at supra-national level, which, if provided for at national level, would constitute State aid, that is provided in order to preserve or restore the viability, liquidity or solvency of an institution or entity referred to in point (b), (c) or (d) of Article 1(1) or of a group of which such an institution or entity forms part.””
“(71) That definition does not encompass any type of aid, but only aid whose objective is “to preserve or restore the viability, liquidity or solvency” of a bank. The Scheme’s objective is two-fold depending on whether the direct beneficiary constitutes an undertaking or not. In the first case, the aid objectively pursues the social goal of Article 107(2)(a) TFEU. In the second case, the aid objectively pursues the goal of addressing the social hardships particular to the vulnerabilities faced by small entrepreneurs under Article 107(3)(c) TFEU. Nevertheless, in both cases, the predominantly social objective indicates that the Scheme’s objective is not to preserve or restore the viability, liquidity or solvency of a bank. The Financial Institutions benefit only indirectly through the aid to the two categories of Eligible Borrowers. This is corroborated by the fact that the aid does not qualify as one of the types of aid contemplated by the Crisis Communications, as indicated in recital (54).”
“(72) Furthermore, it is expected that the size of the support to each Financial Institution would anyway not be sufficiently large to have a material effect on the viability, liquidity or solvency of the bank. As discussed in recital (66), the total budget and overall scope of the Scheme are small compared to the stock of NPLs and to the size of the banks active in Greece. In addition, compared to the potential maximum benefit implied by the total budget, the actual benefit can be reduced by certain factors. This includes the number of applicants as resulting from the eligibility filters and the take-up, the actual ability of the Scheme in turning the NPLs into performing loans, as well as the re-default rates.”
“(73) In conclusion, the Scheme’s objective is not to preserve or restore the viability, liquidity or solvency of a bank and it is also unlikely that it would result in any material effect on any of the financial institutions’ viability, liquidity or solvency.”
“(74) Therefore, the criteria for the aid to be considered as “extraordinary public financial support” are not fulfilled and the Scheme does not fall under the scope of Directive 2014/59/EU.”
“(75) This assessment is without prejudice to the prerogative of the Commission to initiate infringement procedures against a Member State for breach of Union law, including breach of the provisions of Directive 2014/59/EU.”
On the basis of the above, the Commission approved the scheme partly because it did not contain aid and partly because it was compatible with the internal market.
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[1] The full text of the decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/201946/281920_2107769_128_2.pdf.
