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Neelie Kroes lays down the law on bank rescues

By Paul Taylor
July 16, 2009

Neelie Kroes is laying down the law. The European Union’s competition chief may be lenient on timing, but she is sticking rock-hard to the principle that institutions which get public money during the financial crisis must be shrunk, broken up, sold off or wound up to avoid distorting competition. That is the main message of guidelines for restructuring state-aided banks drafted by EU regulators and obtained by Reuters on Thursday.

 

Governments, such as Britain’s, that are hoping to avoid drastic bank restructuring which could complicate efforts to return billions of pounds of public money poured into state rescues are likely to be disappointed.

 

British Prime Minister Gordon Brown sent a warning to Kroes when he addressed a parliamentary committee on Thursday.

 

 “The Competition Commissioner has got to look at financial stability issues as well      as competition issues because we cannot have big banks put at risk of collapse at this particular point, and it’s always been understood that competition has got to work effectively, but in the banking sector we’ve got to also ensure stability,” he told lawmakers.

 

The answer from Brussels is clear. You can have more time, Gordon, but sooner or later your state-aided banks will have to severely slimmed down to compensate for the public money they have swallowed. Kroes said last month that British lenders Royal Bank of Scotland and Lloyds may have to divest a large chunk of their assets to comply with EU antitrust rules.

 

         While the restructuring period should be as short as possible so as to restore viability quickly, the Commission will take into account the current crisis conditions and may therefore allow some structural measures to be completed within a longer time horizon than is usually the case, notably to avoid depressing markets through fire sales. However, restructuring should be implemented as soon as possible and in any case last not more than five years to be effective and allow for a credible return to viability of the restructured bank.

That compares to the normal timeline or two to three years for restructuring in state aid cases. The Commission has already granted Germany’s Commerzbank until 2014 to restructure, effectively applying the five-year rule before it is in force.

 

Kroes says she aims to avoid “fragmentation and market partitioning” despite the trend towards cross-border banks, such as Fortis, retreating to national banking markets. Where immediate implementation of restructuring is impossible, she says, state-aided banks may be subject to “immediate behavioural safeguards”. These could include barring them from paying dividends, making acquisitions or expanding geographically.

On the substance of restructuring, the draft EU guidelines are extremely demanding. Governments and banks will be required to deliver comprehensive information to Brussels on the entire business. Restructuring plans must outline alternative scenarios including divestments, break-up and the sale or orderly winding-up of the bank.

 

  “The plan should provide information on the business model of the beneficiary, including in particular its organisational structure, funding (demonstrating viability of the short- and long term funding structure), corporate governance (demonstrating prevention of conflict of interest as well as necessary management changes), risk management (including disclosure of impaired assets and prudent provisioning for expected non performing assets) and asset-liability management, cash-flow generation (which should reach sufficient levels without State support), off-balance sheet commitments (demonstrating their sustainability and consolidation when the bank bears a significant exposure), leveraging, current and prospective capital adequacy in line with applicable supervisory regulation (based on prudent valuation and adequate provisioning), and the remuneration incentive structure (demonstrating how it promotes the beneficiary’s long-term profitability).”

 

This makes crystal clear that the Commission, not national governments, will have the whip hand in the restructuring of state-aided banks. It promises some epic battles.

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