Almunia: thanks to state aid rules, EC avoided massive competition distortion in financial markets
25 March 2010
The Commissioner said that current efforts to better regulate financial institutions such as CRD III do not run counter to the aims of competition instruments. On the contrary, they should create a framework for better competition without the need for state support to remedy market failures.
The financial sector shows that the relationship between regulation and competition is not necessarily antagonistic. On the contrary, reasonable regulation can be a valuable tool for facilitating competition and creating a level playing field between competitors.
The financial crisis demonstrates very clearly how a lack of effective regulation created incentives for financial institutions not to compete on the basis of the best long-term business models. Rather they were incentivised to pursue excessive risk-taking in order to achieve short-term gains.
To make matters worse, there was no regulation enabling the orderly winding up of banks without endangering financial stability. This meant that an essential principle of competition – the exit of inefficient non-viable players from the market – was not operational. Member states were forced to rescue banks by injecting large amounts of state funds in order to prevent a financial meltdown. It was only because of state aid rules that we were able to avoid the massive distortions of competitions that would otherwise have resulted.
This is why the current efforts to better regulate financial institutions – amongst others, through more appropriate capital requirements, better supervision and the creation of adequate resolution mechanisms – do not run counter to the aims of competition instruments. On the contrary, they should create a framework for better competition, without the need for state support to remedy market failures.
