Push comes to shove in EU-Dutch bank spat

September 18, 2009

EU-INTEL/Push is coming to shove in a stand-off between the European Commission and the Dutch government over the future of state-rescued banks. The outcome has implications for the whole of Europe.

Markets should watch Brussels’ actions on ING, ABN AMRO and Fortis Bank Nederland carefully because they will set a precedent for forthcoming decisions about British, German or Irish banks that could reshape the European banking landscape. They may also determine whether, and when, taxpayers can expect to recover their investments in the banking sector.

EU competition czar Neelie Kroes this week withheld approval of a government guarantee for the bulk of a 28 billion euro portfolio of ING bad loans. The European regulator, whose job is to ensure state aid does not distort competition, said the guarantee required further investigation because the Dutch
government may have illegally subsidised the bank by overvaluing the assets.

Compounding the Dutch problems, Deutsche Bank has pulled out of a deal to buy some of the operations of ABN AMRO, the Dutch lender. Brussels had originally ordered the sale when it allowed Fortis to buy ABN AMRO’s Dutch retail banking operations in 2007. Though Fortis has since been broken up, the Dutch government still wants to merge the two retail banks, both of which are now under state control.

The initially proposed deal would have left the Dutch taxpayer with a potential 300 million euro loss on the assets, which include commercial bank HBU. The government may yet reach a compromise with Deutsche or be able to sell other Fortis or ABN assets to meet the Commission’s conditions.

Nevertheless, the issues at stake between Kroes and her countrymen are broadly the same as those with Britain, Ireland or Germany.

The Commission aims to maintain a level playing field by making state-aided banks shrink their balance sheets by spinning off or winding up activities. This is designed to compensate  healthy banks for the distortion of competition with taxpayers’ money. Brussels also seeks to ensure that bailed-out firms have a viable future without public funds. And it aims to ensure adequate consumer choice by averting excessive concentration and promoting vigorous domestic and cross-border competition.

However, governments that have risked tens of billions of taxpayers’ money to prevent banks collapsing are keen to recoup their investment. Where banks are forced to shrink and sell assets, this could undermine their value.

What happens when the irresistible force of national interest meets the immovable object of European competition law — accepted in principle by all member states — looks set to be tested on the traditionally free-marketeering Dutch battlefield.

From her signals so far, Kroes will be lenient in allowing governments more time to restructure banks, but she will rightly be hard as nails on the restructuring conditions.

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