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Mark Friend and Louise Tolley
Competition Policy in Times of Financial Crisis
7 April 2009
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
NR unable
to meet its
funding
needs
Sep
07
Oct
07
Aid
notified

BoE emergency
liquidity assistance
Aid
approved
as rescue
aid
Nov
07
Dec
07
Commission
opens in-depth
investigation
Treasury guarantee
on deposits/liquidity
facility
Jan
08
Feb
08
Mar
08
Apr
08
UK notifies
restructuring
plan
…
Jan
09
NR steps
up
mortgage
lending
Bradford & Bingley (1)
Ratings
downgrade
FSA informs B&B
that authorisation
to accept deposits
will cease 29 Sep
Mid-Sep 08 26 Sep
08
27 Sep
08
5 yr CDS
spreads reach
1339 bps /
share price
below 20p
B&B
Transfer
Order takes
effect
Aid
approved
28 Sep 29 Sep 30 Sep 1 Oct
08
08
08
08
Two bids
received (Abbey
offers £612m for
retail deposits
and branch
network)
Aid notified
Bradford & Bingley (2)
 Who are the potential aid beneficiaries?
B&B?
Retail
depositors?
The
transferred
activity?
Abbey?
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?
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