Related: EU Loosens State Aid Rules for Bank Rescue

The European Commission on Monday approved a French financial rescue plan aimed at encouraging banks to increase lending to the real economy.

"The French recapitalization scheme provides France with effective means of strengthening confidence on the markets and, above all, of financing the real economy, while at the same time establishing safeguards to limit distortions of competition," European Union (EU) Competition Commissioner Neelie Kroes said.

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 (26.6 billion U.S. dollars) at most to help banks hit by the credit crunch lend to companies and individuals, with 10.5 billion euros (13.3 billion U.S. dollars) 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.

The approval was made after weeks of wrangling between Paris and Brussels.

The Commission said it had focused on the level of remuneration payable to the state for the capital injected and on the establishment of mechanisms to ensure that the state's involvement in the banks' capital is as brief as possible.

"As a result the French authorities adjusted the level of remuneration and introduced a mechanism for the payment of a premium on the capital being reimbursed, enabling this objective to be achieved," the EU's competition guardian said.

The Commission gave the go-ahead according to its new rules on bank recapitalization released earlier in the day.

Bowing to pressure from France and other member states, the Commission swiftly loosened its rules on financial rescue plans, opening new possibilities for state aid to boost credit flows to the real economy in the current financial crisis.