Competition Policy in Times of Financial Crisis7 April 2009

Mark Friend and Louise Tolley

What this seminar will cover

Introduction - setting the scene Overview of State aid regime Rescue and restructuring aid

Northern Rock B&B

EU interventions in the financial crisis Banking Communication 13 October 2008 Recapitalisation Communication 5 December 2008 Impaired Assets Communication 25 February 2009

UK financial support measures 13 October 2008 Competition v. financial stability Relaxation of antitrust enforcement?

Setting the scene

EU policy in a nutshell: On State aids:

“Controlling subsidies to banks at this time protects both taxpayers and the banks that are sound and able to operate without government intervention.”

On mergers: “Nor do we want to see two struggling banks cripple each

other through a botched merger, or create another bank that is too big to fail.”

On cartels: “We are crystal clear that cartels are harmful no matter

what current economic growth rates are.”

Remarks of Commissioner Neelie Kroes, 30 March 2009 from “the crisis and the road to recovery”.

Overview of State Aid Regime (1)

Art. 87(1) EC prohibits aid which entails:

Transfer of State resources

Conferring selective advantage

On one or more undertakings

Distorting competition

Affecting trade between Member States

Overview of State Aid Regime (2)

Selective v. general measures “Advantage” v. “market economy investor” principle Member States must pre-notify aid (Art. 88(3)), else

unlawful under EC law and may be unenforceable under national law

Commission can order recovery of unlawful aid Commission decides whether aid is compatible with

common market (Art. 87(2) and (3)) Phase I clearance for non-problematic aids Phase II ‘serious doubts’ cases

Application to the financial sector

Two alternative grounds for approving aid to banks

Art. 87(3)(c) Permits aid to facilitate the development of certain

economic activities… where such aid does not adversely affect trading conditions to an extent contrary to the common interest

Legal basis for aid to failing banks

Art. 87(3)(b) Permits aid to promote serious economic

disturbance Legal basis for aid to healthy banks

Rescue and Restructuring Aid

The R&R Guidelines Rescue aid

To keep failing firm afloat pending restructuring or liquidation

Must be warranted on grounds of serious ‘social’ difficulty Reversible liquidity support permitted for up to 6 months Must then be repaid, or submit a restructuring/liquidation

plan Restructuring aid

Must lead to long term viability Undue distortions of competition to be avoided Limited to minimum necessary

Northern Rock

Sep 07

Oct 07

Nov 07

Dec 07

Jan 08

Feb 08

Mar 08

Apr 08

… Jan 09

NR unable to meet its

funding needs

Aid notified

Aid approved as rescue

aid

UK notifies restructuring

plan

Commission opens in-depth investigation

NR steps up

mortgage lending

BoE emergency liquidity assistance

Treasury guarantee on deposits/liquidity facility

Bradford & Bingley (1)

Mid-Sep 08 26 Sep 08

27 Sep 08

28 Sep 08

29 Sep 08

30 Sep 08

1 Oct 08

Ratings downgrade

5 yr CDS spreads reach

1339 bps / share price below 20p

FSA informs B&B that authorisation to accept deposits will cease 29 Sep

Two bids received (Abbey offers £612m for retail deposits

and branch network)

B&B Transfer

Order takes effect

Aid notified

Aid approved

Bradford & Bingley (2)

Who are the potential aid beneficiaries?

Retail depositors?

B&B?

Abbey?

The transferred

activity?

The Banking Communication 13 October 2008

Signifies move towards a more flexible approach Commission guidelines recognise that Art. 87(3)(b)

can be applied to systemic crisis General principles of R&R Guidelines still apply Application limited to banking sector Endogenous v. exogenous problems: is the dividing

line always clear?

What does the Banking Communication allow?

Guarantee schemes Eligibility Types of liability covered Duration Remuneration Behavioural conditions

What does the Banking Communication allow? (2)

Recapitalisations: Eligibility Proportionality Remuneration Haircuts Monitoring

Controlled winding up Other forms of liquidity support

Recapitalisation Communication 5 December 2008

Further guidance requested by industry Supplements the Banking Communication Contains principles governing different types of

recapitalisation: Recap at current market rate

Generally no additional safeguards needed Temporary recap of fundamentally sounds banks

Price can be below market rates, but remuneration must factor in risk profile of bank

Recap of banks not fundamentally sound Higher remuneration, strict behavioural safeguards and

compulsory winding-up / restructuring

Impaired Assets Communication 25 February 2009

Aim is to help Member States deal with “toxic assets” on banks’ balance sheets: to avoid “zombie banks”

Ensures consistency of asset relief measures across Europe, and compliance with State aid rules

Again, supplements the Banking Communication Type of asset relief scheme will be a choice for the Member

State: Purchase assets and put in central

“bad bank” Guarantee bad assets on bank’s

balance sheet Asset swap Nationalise banks and take direct

control over assets

UK financial support measures

Three measures approved on 13 October 2008:

Scheme Measure Limit

Bank recapitalisation scheme

New Tier 1 capital to bolster balance sheets (6 months)

£25bn for purchase of shares plus further £25bn support

Wholesale funding guarantee scheme

Guarantee for short/medium term debt (6 months)

£250bn

Special Liquidity Scheme

Extension of collateral accepted for £ and US$ money market operations

£200bn

And before we leave State aid…

…what about the real economy? 17 December 2008: Commission published

Communication on Temporary Framework for supporting access to finance in the current financial crisis

Aimed at the wider economy, not just the financial sector

Examples in the UK: Scheme to grant up to €500,000 for businesses in

difficulty due to the credit crunch Temporary measures to grant loan guarantees and

interest rate subsidies Scheme to support lending to businesses

Competition v. financial stability (1)

The role of UK merger control:

1. Banking (Special Provisions) Act 2008: allowed HMT to broker mergers – disapply “any specified statutory provision or rule of law” (see Bradford & Bingley)

2. Similar provisions now in Banking Act 2009

3. UK merger control: intervention by the SoS Allows SoS to balance competition and public interest – can

refer to CC where OFT finds no competition concerns, or clear notwithstanding competition concerns

Pre-Lloyds / HBOS, intervention allowed on grounds of national security or ‘media plurality’

Order introducing ‘financial stability’ as a third ground Lloyds / HBOS cleared despite OFT finding competition

concerns

4. Likely to see more “failing firm” arguments in merger cases?

Competition v. financial stability (2)

The role of EC merger control: “The Commission is committed to continue applying

the existing rules, taking full account of economic environment.” (Neelie Kroes, 6 October 2008)

Potential for derogation from standstill obligation to allow immediate implementation of transactions subject to rescue measures Not seen this in practice thus far

Commission’s preferred approach is to take structural measures that clear balance sheets, restructure or wind down banks, not for ailing banks to merge: “two turkeys do not make an eagle”

Relaxation of antitrust enforcement?

Antitrust enforcement remains vigorous in the EU Commission policy is to take hard line on cartels

“They cause billions of dollars of direct harm… and by cracking down hard on one cartel, we estimate that we stop another five.” (Remarks of Commissioner Neelie Kroes, 30 March 2009 from “the crisis and the road to recovery”)

Suggests no relaxation in fining policy What about horizontal cooperation agreements, e.g.

to reduce capacity?

Questions?

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

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