State Aid to Banks in the Financial Crisis: The Past and the Future

Posted by D. Daniel Sokol

Emily Adler, James Kavanagh, and Alexander Ugryumov (all Oxera) offer their thoughts on State Aid to Banks in the Financial Crisis: The Past and the Future.

ABSTRACT: This Economist's Note considers the use of state aid policy in Europe to control the flow of public funds to the banking sector during the financial crisis, and the potential implications of so doing. During the financial crisis, state aid decisions have had to prioritise saving financial institutions over distortions to competition. But post-crisis, saving institutions is not the same as saving the financial system. The more stable the financial system becomes, the easier it is for state aid control to take a tough approach to aided banks. Looking forward, as aid is unwound there is a policy choice to be made whether to prioritise competition in the single market (by coordinating withdrawal of aid) or to prioritise competition within national markets (by removing state support as and when local conditions permit)