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Kroes hits right note on EU bank aid

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Neelie Kroes, the EU Competition Commissioner, is right to be taking a hard line on state aid to banks, which will distort competition if not repaid. However, she will have to fight member states like Britain and Germany, which are desperately encouraging banks to lend locally, nursing large losses on their capital injections or trying to avoid massive upheaval in their banking industries.

The reasons for her tough stance — laid out in guidelines she will unveil on Thursday, obtained by Reuters – are sensible. At their heart is the desire to maintain the imperfect European market in financial services that the Commission has done so much to foster. State aid risks distorting this market because of members’ differing ability and willingness to underwrite their banking sectors.

Kroes is also concerned about moral hazard: unless banks that have received state aid are put through a restructuring boot-camp, others will learn that it pays to take wild risks. Many private-sector banks are already muttering that their state-backed rivals are rampaging through the market.

The British government had to rein in Northern Rock, a nationalised mortgage lender, after rivals groused that it was topping the “best buy” league tables. In the City, investment bankers bitch that Royal Bank of Scotland  is showing as much aggression as in the heyday of Sir Fred Goodwin.

Neelie Kroes lays down the law on bank rescues

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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.

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