Britannia Radio

The expected policy on reform for failed banks has appeared and along the lines forecast.

Banking is more than a national industry;  it is international.  Therefore for individual banks to trade and not just be allowed to go bust requires corresponding conditions,  So far what comes out of Brussels seems necessary and reasonable.  

Personally I would like to see an industry where unprofitable sectors , reckless traders and irresponsible lenders were allowed to go bankrupt.  It would encourage the others no end!    But that needs separation of activities,  if not total demerger of investment banking from so-called ‘retail’ banking.   

Christina

TELEGRAPH 24.7.09

Brussels gives UK five years to fix RBS and Lloyds

Royal Bank of Scotland and Lloyds Banking Group have just five years to wean themselves off state aid or be "wound down" by Brussels.

 

By Bruno Waterfield in Brussels and Philip Aldrick

The European Commission revealed its hard line on all banks across the continent being propped up with taxpayer support alongside remedies to prevent distortion in the market such as branch sales and asset disposals. "We need to make banks viable again without state support and to reinvigorate competition," EU Competition Commissioner Neelie Kroes said.

She detailed new guidelines based on three principles – that banks which receive help must be given a viable future without further support, that they must pay some of the restructuring costs, and measures must be taken to limit distortions of competition.

 

European Union competition officials said they received restructuring plans for RBS in June and Lloyds earlier this month. Philip Lowe, director general of the Commission's competition department, said that his officials were now looking at the long-term viability of both banks and their ability to be weaned off state aid within five years.

If they are unable to survive on their own, they will be closed down, as with other industrial sectors such as shipbuilding. "We will do that with the banking sector. We would impose a winding down if the viability of the bank isn't assured," said Mr Lowe.

He added that significant disposals at both banks would be likely: "We believe some significant restructuring needs to be carried out. We are in full contact with the UK authorities and with the banks concerned in order to arrive at the appropriate solutions in the shortest possible time," he said.

However, regulators said asset sales "can be spread over a number of years in the current crisis".

Mr Lowe also stressed that more work needed to be done across Britain's banking sector to enforce fair competition and to ensure Government bail-outs are not "prolonging the bank's inadequate or risky past behaviour".

Commission regulators are concerned that national governments are avoiding the hard decisions on shutting down banks that are no longer viable without state intervention.

"The difficulty with the banking sector is the degree of tolerance of a bank's failure," said Mr Lowe. "It is something we believe needs to be tolerated more in the longer term because public support for any bank can only diminish the incentives for real competition."

The commission warned that some state aid might be made conditional on shares being sold off or limits being placed on pricing and marketing strategies receiving support. Banks should also avoid pay-outs to bondholders during restructuring, it said.

An RBS spokesman said the bank was reviewing the details of the EU guidelines. A Lloyds spokesman said: "As we have previously stated we, along with all UK banks in receipt of state aid, are working closely with HM Treasury to demonstrate to the European Commission that Lloyds Banking Group has a strong plan to exit state aid."

EU OBSERVER 24.7.09

Brussels lays out restructuring agenda for banks

ANDREW WILLIS

 BRUSSELS – The European Commission laid out new guidelines for banks receiving government support on Thursday (23 July) in order to avoid distortions of competition within the sector.

Since the fall of Lehman Brothers last September, roughly 30 banks within the EU have received state aid to keep them afloat on condition that a restructuring plan be submitted within six months.

But banks will have five years to implement their plans, an indication that the commission still considers the current climate extremely difficult.

Philip Lowe, the commission's director-general for competition, said the guidelines were "the ultimate stage in restoring health to the banking sector …which is done by returning individual institutions to viability without state aid."

He cautioned that state aid could not be provided so that banks could continue with a "failed business model."

Instead, the restructuring plans must take account of "the present state of and future prospects of financial markets, reflecting best-case and worst-case assumptions," say the guidelines, which will remain in place until 31 December 2010.

Amongst the clarifications for member state governments and banking executives contained within the document, the commission states that individual banks and their owners must carry their fair share of the restructuring costs.

It "negates the purpose of the aid" if it is used to pay bondholders, said Mr Lowe.

"Once the impression is given that governments will step in to help banks to socialise loses but profits are privatised you have a problem of moral hazard."

Banks that receive state aid will also face behavioural restrictions, so that state aid is not used to compete with other banks when offering financial products such as cheaper mortgages.

Stress tests

Thursday's guidelines indicate that stress testing of individual banks will be a vital component in helping them devise strategies for long-term sustainability.

Stress test results are likely to show that a bank should close down a particular area of its activity or even look to be absorbed by a viable competitor.

"The specificity of the banking sector is the tolerance of bank failure," said Mr Lowe, pointing to government reluctance to let banks fail.

But he added that in a healthy market with good competition between banks, it was only natural that some banks should exit the market.

Unlike in the US, the commission does not envisage the results of stress tests being made available to the public in order to avoid an unpredictable market reaction.

The communication, which indicates that all state aid must eventually be paid back to governments, is the latest commission response to the financial crisis.

In October the EU executive produced an overall communication on bank guarantees. In December it put out guidelines on the recaptialisation of banks and in February it published guidelines on how to deal with toxic assets.