01 October 2008

MLex Comment: Faster EC bank rescue approvals won’t resolve competition issues

The Commission is streamlining the system for bank rescue aid approvals, bypassing the need for the full commission to assess the impact of the bailouts on competition. Such expedited rescue aid approvals can go only some way to help restore confidence.

The Commission is streamlining the system for bank rescue aid approvals, bypassing the need for the full commission to assess the impact of the bailouts on competition. 

 

Its decision to speed up the process reflects the severity with which the commissioners and governments in member states assess the current situation. The commission today authorised the UK authorities' package of measures designed to ensure financial stability, protect retail depositors and support the orderly winding down of Bradford & Bingley, the UK mortgage bank. 

 

Over the weekend the commission worked with UK authorities to ensure measures adopted could comply with state aid rules. It received a formal notification on 30 September, and was able to decide within 24 hours that the state aid measures complied with EU rules on rescue aid. 

 

Authorities in the UK have committed to submit a restructuring and/or liquidation plan within six months, which will be examined by the commission under its rules on restructuring aid. 

 

At the same time, the commission is reviewing plans for several other banks in Europe, including the bailout of Belgo-Dutch bank Fortis and capital injections into Dexia – the Franco-Belgian bank that is the world’s number one lender to local governments. The impact of the global liquidity crisis could lead to other banks also requiring state help. Ireland's government has undertaken to provide 100 percent guarantees to bank deposits and bonds while other governments are examining measures to support individual banks and sectors as a whole. 

 

In order to speed up assessments which previously could have taken weeks or months, the commission is introducing a new process for reviewing state aids. Instead of going to the full 27-member commission for review and approval, Competition commissioner Neelie Kroes, internal market commissioner Charlie McCreevy, and economic and monetary affairs commissioner Joaquin Almunia will assess the bailouts in conjunction with commission president José Manuel Barroso. 

 

Such expedited rescue aid approvals can go only some way to help restore confidence. The prospect of the commission rejecting a rescue plan in which it has had at least some input and for which the guidelines are reasonably clear is extremely remote. 

 

But at the same time, the regulator can hardly sit by if the financial fabric of the single market is being torn apart.

 

The Irish situation is a case where there are issues of discrimination against certain banks and which is unlikely to have been as closely co-ordinated with the commission as the individual bank situations in the UK, Belgium, France and the Netherlands. While rival banks being put at a competitive disadvantage may hold back on criticism for now, those most affected will have a case to make. Ireland's move clearly has cross-border implications.

 

It is in the longer term, however, that competition issues are more likely to arise across the board.

 

In individual rescue situations, governments still have to submit restructuring plans for the banks within six months, and it is these plans that will require much more scrutiny. 

 

The commission – also today - did just that when it opened an in-depth investigation into state support measures in favour of German bank WestLB. As a consequence of investments in US sub-prime markets, WestLB ran into financial difficulties and in February 2008, the owners of the bank, the state of North Rhine Westphalia and the savings banks associations, provided a risk shield of five billion euros. The commission approved the temporary rescue aid on 30 April. 

 

Restructuring aid reviews, by contrast, usually take several months to complete and can run into two years or more. The consequence of the reviews is usually a much scaled down banking operation following substantial asset sales, and the withdrawal of the state from the bank. 

 

With more and more banks requiring restructuring, large scale consolidation in the sector – albeit much of it a couple of years down the line – is inevitable.

 

But some of that consolidation is happening already now, and the consequences on competition appear to be conveniently pushed aside. 

 

A case in point is that the approval of the rescue aid in the Bradford & Bingley situation doesn’t resolve the competition issues being raised by the current restructuring in the UK retail banking markets. 

 

With the sale of Bradford & Bingley's retail deposit book and branches along with a matching cash element to UK lender Abbey National, the UK government has ensured a very large chunk of UK retail banking is in two hands – Lloyds-TSB and Spanish giant Santander. 

 

Abbey National owner Santander recently acquired another UK bank with strong mortgage lending and retail saving roots in the building society sector, Alliance & Leicester. Santander maintains that after the latest acquisition, its market share of the UK retail banking sector will be an estimated ten percent. Nevertheless, the UK retail banking sector is not UK wide but generally regional or national (with England and Wales at least considered separately from Scotland) in scope. Market shares will no doubt be much higher in certain regions and in particular product markets. 

 

The deal is expected to require merger control approval by the European Commission, the Spanish company has told MLex, although UK regulators at the Office of Fair Trading could seek to take control.

 

And this follows hot on the heels of another rapidly arranged deal in the UK banking sector – LloydsTSB's purchase of rival HBOS – which possibly raises even more competition concerns, with the combined banks controlling an estimated 28 percent of the UK mortgage sector alone.

 

That deal is to be reviewed by the OFT, but any decision made by the anti-trust regulator may then be overridden by the Secretary of State for Business and Enterprise in the 'public interest'. 

 

Such public interest defences or suspension of the normal competition rules may well end up open to legal challenge, not least from potential competitors and consumer groups who could bear the brunt of an incumbent bank’s increased market power.

 

By Robert McLeod

© MLex