Competition Policy in Times of Financial Crisis 7 April 2009 Mark Friend and Louise Tolley.
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Transcript of Competition Policy in Times of Financial Crisis 7 April 2009 Mark Friend and Louise Tolley.
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.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.