The European Commission loosened its state aid rules on Monday for approving national bank rescue plans, bowing to pressure from European Union (EU) member states.

"No concessions have been made but rather we have looked at how we can make things more flexible," EU Competition Commissioner Neelie Kroes told reporters when presenting the Commission's new guidance on bank recapitalization.

The new rules allow EU member states to intervene not only when there is a need to stabilize troubled banks themselves, but also when the public capital is needed to sustain lending to the real economy.

"The guidance takes account of the fact that the credit crunch is now beginning to affect the real economy and that financially sound banks may need state capital to ensure an adequate level of loans to companies," the Commission said.

The new rules distinguished between banks that are fundamentally sound and receive temporary support to enhance the stability of financial markets and foster undisturbed access to credit for citizens and companies on the one hand, and distressed banks whose business model has brought about a risk of insolvency on the other hand.

"State support for distressed banks implies a greater risk of competition distortions, therefore safeguards must be stricter and a thorough restructuring is necessary," the Commission said.

The Commission said banks in distress that face a risk of insolvency should in principle be required to pay a higher rate of remuneration for state support.

Relaxation of the rules was made after several EU member states led by Germany and France last week blasted the Commission's approach in the review of national bank rescue plans.

They criticized the Commission of being bureaucratic and too slow in approval, demanding more flexibility.

Defending her approach, Kroes insisted the EU's state aid policy is the ideal framework for ensuring effective coordination of EU member states policies to counter the financial crisis and to tackle the recession.

Based on the new rules, the Commission gave green light on Monday to a French financial rescue plan, ending weeks of wrangling between Paris and Brussels.

The scheme introduced by the French government is intended for "fundamentally sound" banks which are under severe pressure to increase their capital owing to the financial crisis. This pressure could lead the banks to cut lending to the detriment of the entire French economy.

Under the scheme, the French government is to provide 21 billion euros (US$27 billion) at most to help banks hit by the credit crunch increase lending to the real economy, with 10.5 billion euros initially set aside for six major retail banks.

SPPE, a French state-owned investment company, will invest in securities issued by the beneficiary banks and the securities have to be remunerated at a fixed rate of about eight percent.

France unveiled the plan in October, but the plan was reportedly blocked by the Commission for failure to comply with EU state aid rules, which angered Paris and led to the call for more flexible rules.

Kroes said the Commission will also shortly approve an Austrian bank rescue scheme, which involves 100 billion euros in bank guarantees and cash injections.

In addition, there is a chance for an "agreed solution" on Germany's plan to inject capital into Commerzbank after an expected adjustment, she said.

Germany has been unhappy with the Commission's refusal to approve its recapitalization plan worth 23.2 billion euros for Commerzbank, the country's second-largest bank by assets.

(Xinhua News Agency December 9, 2008)