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Juridical and financial considerations on the public re capitalisation and rescue of financial institutions during periods of financial crises (Part I)

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  • Ojo, Marianne
  • Rodríguez-Miguez, Jose

Abstract

As well as a consideration of why the lender of last resort facility should be used for emergency situations and systemically relevant institutions in particular, an interesting point which will be considered in this paper is the comparison between the European Central Bank (ECB) Recommendation and its application by the Commission in the Re capitalisation Communication, specifically with its Annex, where the Commission explains how it determines the price of equity or own funds1 (ordinary or common shares) - balancing the “real value” with the “market value” within a crisis context. This paper will also consider how to transform the Crisis into an opportunity in order to minimise tax burdens to taxpayers – as well as making financial markets more efficient. Furthermore, whether the Commission and Member States have applied the methodology (the determination of the price of equity – as stated in the Annex to the Re capitalisation Communication) in determining the price of equity with respect to the capital of banks acquired by Member States, will be addressed. Such consideration could provide a vital key to determining the real value of State Aid and the best possible price for which capital could be sold. Given the scale of government intervention and State rescues which occurred during the recent crisis – as well as the prominence accorded to measures aimed at preventing and limiting distortions of competition, calls have been made for competition authorities to take on more formidable roles in designing and implementing exit strategies. In order to foster competition as much as possible, it is proposed that ”governments should provide financial institutions with incentives to prevent them from depending on government support once the economy begins to recover.”

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24344.

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Date of creation: 26 Jul 2010
Date of revision: 10 Aug 2010
Handle: RePEc:pra:mprapa:24344

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Keywords: Financial Crisis; State aid; re capitalisation; MEIP; guarantees; Troubled Asset Relief Program (TARP); fundamentally sound institutions; rescues; restructuring; recovery;

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  1. Takeo Hoshi & Anil K Kashyap, 2008. "Will the U.S. Bank Recapitalization Succeed? Eight Lessons from Japan," NBER Working Papers 14401, National Bureau of Economic Research, Inc.
  2. Ojo, Marianne, 2010. "Liquidity assistance and the provision of state aid to financial institutions," MPRA Paper 23523, University Library of Munich, Germany.
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