Management of Banking Crises and State Aid in Times of Coronavirus

Abstract

The directives and regulations on banking crisis management approved in the years 2013-2014 established inflexible limits on the use of public financial resources. This political choice of the European legislature could cause administrative authorities to find themselves with their hands tied in case the COVID-19 pandemic will give rise to failures of banking intermediaries, jeopardizing the overall stability of the financial system. Such a stance is not consistent with the Treaty approach on State aid that confers large discretion to the European Commission to adapt the rules to different economic scenarios. The criticism does not dispute the principle that public financial support must be the last resort to be activated and that its use must be limited to the minimum. The paper suggests that wide discretion on the part of the administrative authorities is necessary especially in the case of a pandemic-derived crisis, which is very difficult to predict and which dramatically changes the economic scenarios. Moreover, a pandemic causing negative consequences on all economic systems, even if it could have different effects in each Member State, requires collective action. Therefore, the choices on how to react to the crisis, including the case of a banking crisis, must be decided at the European level.

Keywords: banks, crisis management, State aid, Covid-19

JEL Classification: K21, K22, K23