Deposit Guarantee Funds and State Aid: Bank Tercas

The General Court of the European Union (“GC”) has annulled European Commission (“EC”) decision in the Tercas case. The GC argued that the EC wrongly classified as State aid under article 107 of the Treaty on the Functioning of the European Union (“TFEU”) the measures adopted for the benefit of Tercas by the Fondo Interbancario di Tutela dei Depositi (“FITD”), a deposit guarantee fund.

The FITD is one of the Italian deposit guarantee schemes, and it was created to guarantee that investors recover their money if credit institutions have any problems. Banks are required to belong to one of the two guarantee schemes, which are financed by mandatory contributions of member banks. In exchange, the fund covers the investment (up to a certain threshold) of depositors and investors in current accounts or other savings and investment products of credit institutions. The FITD is equivalent to the Spanish deposit guarantee fund.

In 2012, the Bank of Italy found certain irregularities in Tercas. In 2013, Banca Popolare showed interest in subscribing to Tercas’ capital increase as long as there was a prior audit of Tercas’ assets and the FITD covered Tercas’ negative equity. In 2014, after the Bank of Italy’s approval, the FITD preferred to intervene for the benefit of bank Tercas over the reimbursement of bank deposits, so it decided to cover the bank’s negative equity.

The EC learned from the press about FITD’s intervention. After requesting information from the Italian authorities in 2014, the EC opened a State aid investigation in February 2015. In its Decision of December 23, 2015 (Decision SA.39451 (2015/C)), the EC concluded that the measures adopted by the FITD constituted State aid incompatible with the internal market, and the EC ordered Italy to recover the aid plus interest.

Italy, Banca Popolare and the FITD, with the Bank of Italy’s support, appealed the EC decision before the GC.

In its judgment, the GC recalls that State aid must meet two separate and cumulative conditions: (i) being attributable to the State; and (ii) being granted “through State resources” under article 107(1) TFEU.

According to the EC, in the Tercas case both conditions were fulfilled, since (i) the FITD held a public mandate; (ii) public authorities controlled the funds used by the FITD to finance the intervention; and (iii) the contributions used by the FITD to finance the intervention were mandatory.

However, the GC considered that the FITD autonomously decided to intervene for the benefit of Tercas. Italian legislation provides that the public mandate given to the FITD only applies where a member bank is subject to compulsory liquidation, and this was not the case. Therefore, the intervention for the benefit of Tercas was not under a public mandate.

The GC stated that the FITD is a private entity acting “on behalf of and in the interests of the members of the consortium” subject to its statutes. FITD managers are appointed by its general meeting, which is made up of member bank representatives.

According to the GC, the EC did not prove that the Italian public authorities were involved in the adoption of the support measure. The Bank of Italy’s authorization of FITD’s intervention does not suffice to attribute the support measure to the State, since the Bank of Italy acted as a mere supervisory authority, by checking if the intervention was legal, but without any influence on FITD’s final decision to intervene. Although Bank of Italy representatives participated in FITD’s decision-making, they were in the meetings as passive observers.

Finally, the GC concluded that the EC did not prove that the funds granted to Tercas were controlled by Italian public authorities. The EC claimed that the contributions used by the FITD to finance the intervention were mandatory, since banks are required to belong to a guarantee scheme acknowledged by the Bank of Italy. However, the GC stated that the impossibility to dissociate banks from the FITD is irrelevant, and that the intervention for the benefit of Tercas was in accordance with the FITD statutes, in the interest of its members and with private funds.

This GC judgment is very significant because of its possible implications regarding the possibility that deposit guarantee funds bail out banks in trouble. Due to its importance, the EC will probably appeal the judgment before the Court of Justice. In Italy, the judgment has been welcomed as a victory for savers, and the Italian media announced that the affected banks want to bring an action against the EC for the damage caused.

The GC judgment is available here.