08 December 2008

MLex Comment: EC's regulatory intent undented by credit crunch critics

Commission anti-trust regulators are coming under unprecedented criticism for their handling of the financial crisis and the present and future role, if any, of competition policy in regulating European financial markets.

European Commission anti-trust regulators are coming under unprecedented criticism for their handling of the financial crisis and the present and future role, if any, of competition policy in regulating European financial markets. Those proponents of such criticism are likely to be in line for a rude shock.

 

To date, the commission has shown considerable dexterity in handling the state-backed rescue packages both in terms of speed of assessment and in containing them, or their worst excesses, within the framework of single market rules. The commission can be congratulated for even keeping its place at the table, especially important and relevant to the restructuring programmes going forward that will fundamentally change the shape and structure of Europe’s financial services industry. In effect it has developed and applied a framework for the future when such crises inevitably return (see previous MLex coverage here)

 

Part of the commission’s power and presence is that, whatever they may wish to do with propping up their banks, member states need the commission’s go-ahead. Governments can’t risk illegally – i.e. without commission approval – pumping state aid into banks and risking a court challenge in the future. 

 

That will not only put the financial institution concerned at risk, but could damage the value of the businesses when eventually it comes time to sell them back to the private sector. The jurisprudence is there at the courts in Luxembourg and complainants are sure to end up in court (see also here). 

 

The reason why competition policy has mostly been silent to date is that its application largely hasn’t been required. In those cases where it has, and until now that has been solely in terms of merger control, it has been applied in line with normal standards and expectations. 

 

The BNP Paribas acquisition of certain Fortis assets is a case is in point. The decision to clear the deal (link to commission statement here) was taken with commitments by the French bank to dispose of certain assets to overcome competition concerns. Merger control has worked perfectly well. 

 

Where competition policy has been set aside, typically in cases at national level and – of all places – in the UK, the deals are being challenged in court (see coverage of LloydsTSB, HBOS appeal here). The stitched-together Lloyds TSB-HBOS deal may have already had the effect of preventing a run on the bank, but what the bank may eventually look like is still an open question.

 

Both European Commission and national competition regulators have significant and powerful tools to redressing issues that could arise from such a merger. The commission has a little-used provision for post-merger review that can involve commitments to redress competition concerns. 

 

Moreover, and more importantly, the commission has the full force of its anti-trust powers both under Article 81 and Article 82. The latter deals with anti-trust abuses by dominant companies, and the definition of dominance, both in terms of market delineation and market share, and is one where the commission has significant leeway. The former where institutions are colluding – and where so many institutions share a common shareholder with particular political objectives - such collusion could become widespread.

 

Disgruntled customers and competitors are likely to provide the impetus the commission needs to act, and senior officials have indicated to MLex that regulators will be both willing and able to act to address distortions of competition brought to its attention. 

 

There are a number of specific concerns being raised within national competition authorities and these concentrate on where governments are influencing market behaviour and overtly or covertly encouraging collusion in respect of interest rates, lending and borrowing terms and other activities. Both UK Prime Minister Gordon Brown and Chancellor Alistair Darling openly admit to personally pressuring banks to pass on interest rate cuts to borrowers – particularly where those banks have government stakes – regardless of the impact on savers and the relative ability of the banks to attract deposits. 

 

The implications of state guarantees for weaker banks providing an equalisation of conditions for unequal competitors is bound to provide grounds for complaint from healthy banks not requiring state backing. This can be as blatant as publicity campaigns for state guaranteed deposits to government-driven mergers and acquisitions regardless of the financial or commercial merits. 

 

DG Internal Market regulators have been active in enforcing the single market rules, particularly where governments have attempted to subvert cross-border acquisitions of financial services companies in Italy, Poland and elsewhere. While the services have been busy extending the European remit through the Single European Payments Area and the Financial Services Action Plan targeted at wholesale financial markets, they are likely to have much to do to help head off future crises as well as attacking the effects of this one. 

 

The commission will also have considerable scope to act on its own initiative and while its recent attempts at analysing problems within the retail banking sector have been weak, there is significant recognition of what needs to be done. 

 

The commission has been strengthening the units which will be responsible for tackling issues – state aid, anti-trust and single market related – that will be raised in coming years. 

 

And commission president Barroso has made much if his personal commitment to ensuring the European Commission plays a central role in resolving this crisis. It should be in his powers then to switch further resources within the commission to those services which particularly require them, namely DG Competition and DG Single Market and the associated Legal Services. 

 

By Robert McLeod

 

© MLex