Financial Regulatory Forum

Brussels’ tough line to force Europe bank shake-up

By Reuters Staff
September 18, 2009

A pedestrian passes the head office of the Lloyds Banking Group in central London August 5, 2009. By Steve Slater and Foo Yun Chee
LONDON/BRUSSELS, Sept 18 (Reuters) – Europe’s banks face a shakeout as a result of the European Commission flexing its muscles over state aid that the sector gratefully accepted to survive a financial crisis.

Banks will be forced to sell assets and reduce market share, and Lloyds Banking Group, Royal Bank of Scotland, Dexia, Commerzbank and KBC are in the firing line.

Analysts and lawyers say they expect banks that received state aid to be forced by the Commission to sell good assets.

“There are going to be huge financial assets coming into the market in the next three years,” said a competition lawyer in Brussels, who declined to be named. “That will be massive. The question is who is going to buy it.”

Scores of banks have received capital, liquidity and asset protection support in the last year, mostly during a flurry of ad hoc national rescues of an unprecedented scale.

Brussels approved more than 50 rescue plans during the worst of the crisis, and the bloc’s powerful competition commissioner Neelie Kroes is now conducting in-depth probes to make sure the measures haven’t skewed competition.

“Kroes has made clear all along that she wants a certain level of sell-offs and restructuring for banks that received state aid,” said lawyer Till Mueller-Ibold at Cleary Gottlieb Steen & Hamilton, who specialises in state aid cases.

“Look at Commerzbank. With RBS and Lloyds, she wants to show that she is serious and evenhanded as regards all banks.”

Kroes forced Commerzbank to sell off assets and to refrain from acquisitions when giving her go-ahead for Germany’s support measures, and has said that RBS and Lloyds may also have to sell a large chunk of assets.

All this could leave some rivals in a better position, a situation analysts say is only fair.

“For banks who controlled lending and managed risk, now is when they should reap those rewards, now is when they should be able to substantially gain market share,” said Arturo de Frias, analyst at Evolution Securities in London.

The shake-up should have a meaningful impact, he said, citing HSBC, Santander and Barclays as potential beneficiaries.

Top banks that survived the crisis without state aid have been vociferous in putting pressure on Brussels to punish their rivals that held their hand up for taxpayer support, according to a source at the Commission.

BITTER PILL
The Commission took aim at ING this week, saying the Dutch government may have been too generous with a guarantee provided for a 22 billion euro ($32 billion) loan portfolio agreed in January.

It made clear that a slim 10 percent discount paid on the assets was too generous for ING, and it appears likely terms will be adjusted to be less favourable for the bank. It could have to pay another 1 billion euros to get the risk transfer approved, analysts said.

Problems for the Dutch banks were further compounded when Deutsche Bank pulled out of talks to buy parts of ABN AMRO, highlighting the luke-warm demand for assets despite the recovery in financial markets over the last six months.

While banks have always known the Commission would administer a strong dose of medicine, the actual swallowing of the pill may be tougher than expected.

Lloyds, for instance, could be carved up to limit its dominant retail banking position as Brussels reviews the billions of pounds used to rescue the enlarged bank, plus a massive asset protection plan still under discussion.

Lloyds could even be forced to sell Halifax, Britain’s biggest mortgage provider. More likely is the sale of hundreds of its branches, including its Cheltenham & Gloucester arm and many in Scotland, and limits on its market share in areas such as current accounts and mortgages.

The European Commission this week said it was in talks with the UK government and any suggestion about specific sell-offs was “premature speculation.”

DRACONIAN? IT SHOULD BE
Experts said it was always likely the Commission would administer harsh remedies once the bank sector stabilised.

“There is no change in the Commission’s policy or being more draconian, they are just draconian when they need to be in the course of the procedure,” said Jacques Derenne, a competition partner for Lovells LLP in Brussels.

State aid inevitably distorts competition, and the goal was to prevent allowing any undue advantage. “It means sacrifice, and that has always been the case, the banks will not be treated differently,” Derenne said.

The Commission is likely to take this into consideration. It often forces companies to sell assets within a year, but banks are expected to be given up to five years.

Commerzbank was told it needs to sell its Eurohypo property finance arm and other assets to win approval for its state help, but the Commission did not publicise the deadline so as not to depress the sale price.

The bank also had to suspend dividend and interest payments on hybrid debt, and rivals including RBS and KBC have also been forced to clamp down on payouts to bondholders.

Some pain may also be inflicted in other areas. Kroes last week said she was taking a closer look at bonuses paid to staff at state-aided banks.

Also clouding the issue is the looming departure of Kroes, however. She will leave her job at end-October with the end of the current Commission’s term in office but is expected to remain in the caretaker Commission until a new EU executive takes over.

Kroes, say those close to her, will want to clear her desk of the biggest cases before her departure.

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