Bank bail out sparks review of aid rules

Date: 03/10/1996

By Chris Johnstone

THE European Commission has been stung into examining how it can set ground rules for state aid to banks following Crédit Lyonnais' recent dramatic demand for extra cash.

Competition Commissioner Karel Van Miert and his internal market and monetary affairs counterparts Mario Monti and Yves-Thibault de Silguy are launching a search for more detailed subsidy guidelines for the sector.

With the threat of bankruptcy hanging over Crédit Lyonnais, the Commissioners felt they had no option but to agree to an extra 592 million ecu in emergency aid to the state-owned French bank last week.

In Europe, as in the US, allowing a large bank to go under has always been considered politically and financially unacceptable, however great the cost to the taxpayer.

While state aids to airlines tend to capture the headlines, the rash of bail outs for commercial banks hit by the collapse of real estate values during the early Nineties are becoming a major headache for Van Miert.

Crédit Lyonnais - the EU's largest-ever state aid case - was the most traumatic example, with Paris injecting 6.9 billion ecu into the bank to save it from collapse and erasing 21 billion ecu in bad loans from its books.

However, a series of other significant cases are in the pipeline. In June, Banco di Napoli announced that the Italian Treasury would pump 1.1 billion ecu into the bank to avert bankruptcy brought on by 3 billion ecu in loans that were unlikely to be repaid. Germany's Westdeutsche Landesbank is under investigation for allegedly taking advantage of unfair regional government guarantees, while a probe into a 380-million-ecu French rescue aid package for Crédit Foncier continues.

Although the airline, steel and car industries have codes governing the awarding of state aid, no such provisions exist for banks.

Some diplomats suggest that the Commission should follow the example set by its treatment of airline aid and lay down a principle of 'first time, last time' for subsidies to the banking sector. This would ban any bank from asking for a second slice of aid - as has just happened in the case of Crédit Lyonnais - unless there were exceptional circumstances.

“It would be a useful principle,” said one, although he admitted it might be difficult to enforce.

The search for new rules comes amidst criticism from some EU countries that the present situation leaves it unclear when governments can help struggling banks and what painful restructuring might be demanded in return.

Private European banks complain that their state-owned rivals often obtain better credit ratings than their performance deserves because they have the government behind them, allowing them to borrow more cheaply.

Crédit Lyonnais kept a high credit rating even when it was expanding at breakneck speed in risky directions. While British bank Barings was allowed to go under, Crédit Lyonnais was considered too big to fail.

Privately-owned French bank Société Générale said in 1995 that Crédit Lyonnais should be refused any aid and immediately privatised.

This time round, president and chief executive Marc Viénot is keeping quiet after being criticised for accusing the French government and the Commission of ignoring his advice.

“I have been accused of firing on the ambulance, so I will not fire on the funeral procession,” he said recently.

In 1994, when the Commission allowed rescue aid to Spain's Banesto, having established that banks fell within the scope of EU subsidy rules and that aid was justified to avoid a banking crisis, it promised guidelines for the sector.

But they never saw the light of day, with officials too busy struggling to cope with the large number of individual aid cases to come up with an overall strategy.