ANNOUNCED AS TEMPORARYNo
On 17 April 2009, the government of the UK formally notified its intention to establish a guarantee scheme concerning its domestic residential asset backed securities market.
The guarantee comprises an option between a credit guarantee and a liquidity guarantee. These guarantees are alternative and not cumulative. The maximum overall amount of guarantees to be granted within the scheme shall not exceed Ł 50 billion .
The UK Authorities acknowledge that the Scheme contains state aid elements. However, the UK considers that the notified measure is compatible with the common market pursuant to Article 87(3)(b) of the EC Treaty as 'aid... to remedy a serious disturbance in the economy of a Member State'.
The Commission found that the proposed measure constitutes aid in the meaning of Article 87(1) of the EC Treaty and gave the following assessment:
"The scheme will enable the issuer to sell UK residential mortgages back securities (RMBS) and therefore provide the necessary liquidity to the originating banks or building societies on more favourable terms that would have been possible under the conditions prevailing in the financial markets. Inasmuch as this will confer an economic advantage on beneficiaries and strengthen their position vis-ŕ-vis their competitors in the UK and in other Member States, the aid scheme will distort competition and affect trade between Member States. The resulting advantage will be a selective one in that it will benefit only beneficiaries under the scheme and will be financed through State resources." (par. 52 of the letter from the EC to the UK - Brussels, 21.4.2009 C(2009) 3091 final).
Article 87(3)(b) of the EC Treaty enables the Commission to declare aid compatible with the Common Market if it is "to remedy a serious disturbance in the economy of a Member State." This aid has to be applied restrictively and must tackle a disturbance in the entire economy of the Member State according to the interpretation of the Article 87(3)(b) by the Court of First Instance.
The Commission referred to its Communication on the financial crisis (Temporary Framework) and concluded that the Measure complies with the conditions laid therein. Therefore, despite the measure constituting State aid pursuant to the Article 87(1) EC, it is compatible with the Common Market according to the Article 87(3)(b) EC Treaty. The Commission raises no objections against the measure at issue and authorizes it as emergency intervention in the face of the current financial crisis. (par. 57-79 of the letter).
Prolongation and modification of the Asset Backed Securities guarantee Scheme - State Aid N 550/2009
On 8 October 2009 the UK notified a request related to the prolongation of its asset-backed securities scheme until 31 December 2009 as well as a modification of the scheme's characteristics regarding one aspect. The extension is required allow banks a sufficient period of time to issue guaranteed RMBS under the amended scheme rules.
The UK authorities report that it would assist issuance if issuers were able to issue 5 year guaranteed RMBS. This is because the cost of raising guaranteed RMBS issuance is relatively flat across the maturity profile of the securities, whereas the cost of raising 5 year unsecured funding is greater than the cost of raising 3 year unsecured funding.
The existing scheme rules allow for up to one-third of the guaranteed debt actually issued to have a 5 year length. This implies that banks are required to issue guaranteed securities guaranteed up to 3 years before (or at least simultaneously with) any 5 year issuance. However, under other guarantee schemes approved by the Commission, a third of the overall budget may be used for guarantees having a duration between 3 and 5 years.
In order to facilitate take-up of the scheme alongside the CGS and deliver on the scheme's objective to restore securitisation markets, the UK government intends to modify the ABS Scheme to allow banks to issue up to one-third of the total size of the scheme (i.e Ł16.67 billion) at 5 year length, with the rest of the budget reserved for guarantees up to 3 years. To ensure that the scheme remains accessible to all banks, the UK government intends to cap the guarantees available to a single institution to one third of the overall budget. Further, the onethird cap will apply to issuance of 5-year debt by an institution (in other words, the amount of 5-year debt a single institution can issue will be one-ninth of the overall budget). (par. 36-38 of the letter from the EC to the UK - Brussels, 27.10.2009C(2009)8309 final)
The Commission finds that the Scheme constitutes State aid within the meaning of Article 87(1) of the EC Treaty.
Since the Scheme satisfies the conditions for aid under Article 87(3)(b) of the EC Treaty, it is compatible with the common market. The Commission has accordingly decided not to raise any objections to the prolongation of the Scheme until 31 December 2009 and the aforementioned amendment of the limit to the use of the guarantees per maturity.
A state measure in the GTA database is assessed solely in terms of the extent to which its implementation affects the extent of discrimination against foreign commercial interests. On this metric, the state aid proposed here is discriminatory.
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