Imputability of financial aid to an Italian ailing bank: The Tercas judgment of the General Court of the EU

Introduction

In the Tercas case[1] the General Court of the European Union (GC) has annulled a previous decision by which the Commission found illegal and incompatible state aid in support package granted by national authorities to a bank. The GC held that the Commission had wrongly qualified the national measures as state aid. Indeed, the Commission failed to demonstrate that the measures were attributable to the state and used public resources. These are constitutive elements of the notion of state aid and are essential conditions for the application of Article 107 TFEU.

The legal background

The Fondo interbancario di tutela dei depositi (FITD) is a private law consortium set up by Italian banks on voluntarily basis in 1987. The purpose of the FITD is to run a guarantee scheme for the depositors and it was recognized by the financial supervisor in charge, the Bank of Italy (BI), as one of the deposit guarantee schemes authorised to operate in Italy in accordance to Directive 94/19/EC.

According to the articles of association of the FITD when a bank is placed under the compulsory liquidation procedure, the consortium has to reimburse the depositors of the liquidated bank up to the sum of € 100,000. In addition to that compulsory intervention, the FITD may also opt for a voluntary intervention where this step can reduce the financial costs of the mandatory deposit guarantee scheme that the FITD members have otherwise to bear.   

The facts of the case

Cassa di Risparmio della Provincia di Teramo Spa (Tercas) was an ailing Italian small regional bank. In April 2012 the Ministry of Economics and Finance (MEF), upon suggestion of the BI, subjected Tercas to a special administration procedure. In October 2012 Banca Popolare di Bari ScpA (BCB) communicated to the special administrator that it was ready to make a capital contribution in favour of Tercas upon the condition that the FITD covered the financial losses of the beneficiary. Eventually, the FITD agreed with BCB, considering the higher costs to be borne by its members to reimburse the depositors of Tercas under the compulsory intervention triggered by compulsory liquidation of the bank. The measures agreed by the FITD and BCB were also authorised by the BI.

In May 2014 the FITD implemented the support package for Tercas, whose overall worth was € 300 million. The package comprised a capital injection of € 265 million and two guarantee arrangements of € 30 million and € 35 million, respectively. At an extraordinary meeting of the shareholders of Tercas hold in July 2014, it was resolved to cancel all the existing shares and approve a share capital increase reserved to BCB. Subsequently, BCB subscribed all the shares allocated to it, thereby becoming the sole owner of Tercas.

However, the European Commission took the view that the support package in question was illegal and incompatible state aid[2]. The incompatibility finding was based on the following facts and circumstances: i) the FITD is entrusted with a public law mandate; ii) the Italian authorities were capable to affect all the phases of the implementation of the FITD intervention; iii) the FITD had a mandatory nature because the Italian banks were obliged to adhere to it and fund the interventions decided by the board of the FITD on which the member of the consortium had no veto rights. From these factors the Commission inferred that the adoption of the support package was attributable to the state and that such measures were funded through public resources.  

Italy, BPB, FITD and BI did not agree with the incompatibility finding and appealed the Commission decision before the GC. The grounds of appeal revolved around the following issues: was the aid granted to Tercas imputable to the state? Was the aid funded through public resources?

The judgment of the General Court

a)The requirement of imputability of aid to State

As clarified in Stardust Marine, this requirement is satisfied where public authorities are involved in the decision whether to grant the aid[3]. But where the aid is granted by a private law entity, considering the greater degree of decisional autonomy enjoyed by these organizations, a specific legal test applies to establish whether the aid is imputable to the state. This test was summarized by the GC in the sense that the Commission has to give sufficient evidence to demonstrate that the objected measures were taken under the actual influence or control of public authorities and hence they were imputable to the state[4]. The key factor is the degree of intervention of the public authorities as to which measure to adopt and how to fund them[5].

The GC noted that the Commission had correctly applied this test to ascertain the state origin of the contested measures but it was not happy with how this test was administered. In that regard, the appellants argued that the aid was decided by the board of the FITD with the unanimous agreement of all the representatives of its members upon a request of the special administrator. Had the intervention been incompatible with the interests of the members of the FITD no public authorities could have obliged to grant the aid to Tercas. Then, the GC went on to ascertain whether the Commission had taken these factors into consideration when it applied the relevant test.

What the GC found is that the Commission failed to prove to the requisite standards that the aid to Tercas was imputable to the state for the following reasons.   

First, voluntary interventions decided by the FITD generally pursue the private interests of its member banks, avoiding the more serious financial consequences stemming from the compulsory liquidation of a bank that entails the reimbursement of its depositors. In other words, the articles of associations of the FITD favour the private interests of its members over the public interest in protecting savings. A further objective of the FITD interventions is to prevent compulsory liquidation of banks from harming its members and the whole banking system, focusing in particular on the reputation of banks and the risk of bank runs. Yet, according to the GC, whether private interests and public interest coincides cannot be taken as a relevant factor to establish the involvement of pubic authorities in the decision-making process leading to the grant of the contested aid.

Second, the GC stressed that, contrary to what was held by the Commission, the FITD intervention did not discharge a public law mandate. Under the Italian banking law system, the only public law mandate imposed on the FITD is to repay depositors of a compulsorily liquidated bank. Apart from that, no national provision requires the FITD to intervene and grant a financial aid to a bank. On the other hand, the possibility for the FITD to take such actions was autonomously decided by its members that agreed to accordingly amend the articles of association of the consortium. Having said that, the GC concluded that the aid granted to Tercas had a purpose other than the repayment of the depositors of a bank placed under the compulsory liquidation procedure and did not discharge a public law mandate.

Third, the GC considered whether the FITD was influenced by public authorities. It noted that the FITD is a private law consortium whose corporate bodies are appointed by the general meetings of its members. Hence, there was no structural link between the FITD and public authorities. Then, the GC looked at the regime for the BI regulatory authorisations for banking transactions. It pointed out that the BI gives such authorisations in the context of its supervisory function when it is satisfied that the transaction complies with the relevant regulatory framework.

On the other hand, the BI has no power to require the FITD to grant financial support to ailing banks. The articles of association of the FITD read that the delegates of the BI can participate in the meeting of the bodies of the consortium as observers and they do not have voting rights. In essence, the BI delegates played a merely passive role in the decision-making process of the board of Tercas. This finding could not be put into question by the facts and circumstances adduced by the Commission, which did not prove that the BI representatives influenced the FITD decision to adopt the contested measures. Similarly, the fact that the BI was kept informed about the ongoing negotiations among the special administrator, the FITD and BCB was not relevant. Being informed about the transactions concerning the regulated entities is a legitimate need of the regulator.

Therefore, the GC drew the conclusion that the Commission did not prove in a sufficiently convincing manner the involvement of the Italian public authorities in the adoption of the aid.

b)The requirement of funding the aid through public resources

For this requirement to be met, it is necessary that the funds used for the aid are under the control of the public authorities[6]. In the view of the Commission, this was the case with Tercas because the FITD fulfilled a public law mandate and because the members’ contribution to the FITD were mandatory and placed under the control of public authorities.

The GC, however, rejected the Commission’s finding. As explained above, the only public law mandate imposed on the FIDC was the repayment of depositors in connection to a compulsory liquidation procedure. Intervention that takes place before liquidation, as the aid to Tercas, are then outside this mandate. It also noted that the aid to Tercas employed financial resources from the funds managed by FITD and that the said funds were formed by the mandatory contributions paid in by the FITD members in accordance to private law rules. Again, the legal basis for the FITD intervention is not to be found in a public law provision but rather in a provision of the article of association of the consortium. And, as hinted above, the FITD decided to grant the aid to Tercas because that was in the interest of members.

In conclusion, the GC accepted the pleadings submitted by the appellants and quashed the challenged decision of the Commission.

Conclusion

Tercas stirred a harsh debate within the Italian public opinion. Many complained that the overzealous approach to the enforcement of state aid rules followed by the Commission prevented the national authorities from taking more effective measures for other ailing banks that had been subsequently liquidated. Be that as it may, the GC judgment is a wake-call for the Commission for a careful application of state aid rules to assess the compatibility of national measures adopted by a private entity.

A bone of contention was the imputability of aid granted by private law entities to the state as required by Article 107 TFEU. To deal with this issue, the Commission applied the correct test the key factor of which points to the degree of involvement of public authorities in the granting and implementation of aid. However, the GC ruled that the Commission wrongly administered the test. Its findings were not supported by evidence gathered by the Commission. On the contrary, the facts and circumstances adduced by the Commission were interpreted by the GC in the sense that the FITD decided to grant the aid to Tercas free from any influence from public authorities.

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[1] General Court, judgment of 19 March 2019, Joined Cases T-98/16, T-196/16 and T-198/16, Italy et al v Commission.

[2] European Commission, decision of 23 December 2015, Case SA.39451, State support to Banca Tercas-Italy.

[3] CJEU, judgment of 16 May 2002, Case C-482/99, Stardust.

[4] General Court, judgment of 25 June 2015, Case T-305/13, Sace v Commission. 

[5] General Court, judgment of 27 September 2012, Case T-139/09, France v Commission. 

[6] CJEU, judgment of 9 November 2017, Case C-656/15, Commission v TV2 Danmark.