Van Miert set to be given new powers to rescue ailing banks

Date: 06/03/1997

By Tim Jones

WRONG-footed by the increasing number of banking bail-outs, European Commission competition officials have drafted new rules for fast-track authorisation of rescue aid.

With France's ailing state-owned Crédit Lyonnais about to request subsidies worth 4.5 billion ecu on top of the 7.5 billion ecu it has already received, the Commission is keen to make its aid-vetting procedures as clear as possible to avoid charges of caving in to political pressure.

The new code would give Competition Commissioner Karel van Miert sole authority to grant overnight approval for cash injections aimed at buying time for a bank on the edge of failure.

Under existing rules, his decision must be approved by fellow Commissioners, slowing down an already long and cumbersome procedure. While this may not cause too many problems in some industries, the banking sector sometimes requires decisions to be taken at a moment's notice.

When Barings suddenly went bankrupt two years ago, the Bank of England had to decide over a weekend whether to allow it to go under or provide enough cash for it to honour its debts.

But Barings was a small fish. Since the crash in property prices during the early Nineties, the Commission has had to deal with big aid packages for Spain's Banesto, Italy's Banco di Napoli, a rash of French financial institutions and ultimately Crédit Lyonnais - the biggest state-aid case in the Union's history.

Under the new guidelines, a member state could notify emergency aid packages to the Commission one day and have them cleared the next.

If these kinds of enabling powers are to be given to Van Miert alone, he will have to work within strictly defined rules. Only those measures which could be clearly shown to be one-off and designed solely to keep the bank afloat would be allowed. The payments would have to be made at the interest rates applying in the markets, and loans would have to be temporary.

This was the case in the Banesto bail-out, but officials say these criteria might not have been satisfied in the 600-million-ecu payment to Crédit Lyonnais.

When the Commission approved the overall aid plan for the bank, officials specified that bad assets worth 20 billion ecu had to be hived off into a new entity. This was to be financed by a 19-billion-ecu loan from Crédit Lyonnais.

The problem for the bank was that it would only receive 85&percent; of the normal interest rate paid on loans while it had to raise the cash on the markets at those normal rates. Creaking under the cost of this loan, the bank pleaded for new state money to save it from collapse.

Van Miert approved it for 1995-96 only, but he made it clear that he did not like having a gun held to his head and wanted to ensure his staff were better prepared next time.

Officials will present the guidelines to Van Miert in the coming weeks and, if approved by the full Commission, they will then be turned into a communication to member states.