Neelie Kroes means business

European competition commissioner Neelie Kroes means business when it comes to breaking up banks that have received state-aid but which have too dominant a position in their home markets — and has Lloyds Banking Group and Royal Bank of Scotland firmly in her sights.

A former Dutch government minister, Neelie Kroes has made it her mission to root out anti-competitive practices, illegal subsidies, price-fixing cartels and the abuse of state aid across Europe since being appointed commissioner in 2004.

She recently said: “The need for competitive market structures is stronger than ever; the likelihood of significant divestments by RBS and Lloyds is strong.”

Neelie Kroes, a diminutive 68-year-old Dutchwoman, had already made clear that state-rescued RBS and Lloyds would not be allowed to persist in their current somewhat bloated forms, givne an unfair advantage through the bailouts but enjoying a dominant position in their home market.

She told the 300 or so delegates at the British Bankers Association conference in Merchant Taylors Hall on 30 June: ‘RBS is not a bank with a sustainable business approach… This bank was not merely too big to fail, it was: too big to supervise; too big to operate; too complex to understand and highly dangerous to the European Single Market . . .

‘For me, a win–win situation means: the banks are viable without state support; the taxpayers escape a huge bill; non-aided banks are not punished because of aid given; the bank has a business model that reduces systemic risk. So we will be working with the UK government to achieve this . . . I appeal again to your self-interest. There can’t be a second bailout.’

Prior to June 2009, many British bankers and indeed politicians seemed ignorant of the EU’s state-aid remedies or that Neelie Kroes had enforced some 100 restructurings on bailed-out European banks over the previous nine months. For many others, however Neelie Kroes’s intervention came as a breath of fresh air. At last, someone seemed willing to stand up to the banks instead of just handing them billions and mollycoddling them.

Gerry Rawcliffe, managing director of Fitch Ratings‘s financial institutions group, last week said: “The capacity for the European Commission to materially influence both the future shape of state-aided banks and their capital remuneration policy should not be under-estimated.”

Neelie Kroes to get tough with Britain’s state rescued banks

He said enforced asset sales, branch closures, commitments to capping market share and pricing could all be on the agenda for RBS and Lloyds, which acquired HBOS in January.

The move heightens the chance Lloyds will be forced to divest itself of one of its branch networks — perhaps Halifax or the former TSB network. Such a move would be welcomed by campaigners for competition and financial biodiversity. RBS is expected to have to find ways of unwinding its dominant position in small business banking.

Fitch Ratings last week downgraded hybrid capital instruments (subordinated debt) of both Lloyds and RBS, after the EC revealed it could force the banks to default on coupon payments in favour of more senior debts.

The European Commission said that: “Banks should not use state aid to remunerate equity and subordinated debt when those activities do not generate sufficient profits”.

A spokesman for RBS said: “We fully recognise the legitimate role of European Commission in this process and we’re co-operating fully with them and HM Treasury.

“We’ve already presented a significant and radical restructuring plan which will reduce the size of RBS and the assets on the balance sheet by one-fifth, and this is already underway. It remains to be seen whether this will be sufficient from the commission’s perspective. Discussions are ongoing.”

An industry source said that whereas RBS’s market share has not altered as a result of last year’s government bail-out, Lloyds’ market share positions increased dramatically through the government-sanctioned rescue takeover of HBOS.

This blog post on Neelie Kroes was published on 23 August 2009