When the European commissioner for competition, Neelie Kroes, announced at the end of October that ING must be broken up and reduce its balance sheet by 45% to comply with state aid rules, not just the banking industry was shocked by the harsh conditions.
Regulators and policy-makers desperately seeking solutions for their troubled banking systems are pondering taxes, higher capital levels, tighter liquidity rules and even living wills, but despite all the politicking, Ms Kroes has revealed that they are not calling the tune. In the name of fair competition, she has also commanded WestLB and Commerzbank to nearly halve their balance sheets; in November she announced that the UK's Royal Bank of Scotland (RBS) would be forced to sell some of its most profitable businesses and forbidden from joining the top ranks of debt underwriters. The UK's Lloyds will be forced to offload a huge number of branches, an online banking operation and the Cheltenham & Gloucester mortgage business.
Question of priority
State aid rules exist to prevent government support offering unfair competitive advantage, but perhaps saving the banking system should trump EU competition law for a little longer. It is not so long ago that banks were looking over the abyss and many argue that they need more time to recover before being forced to sell the profitable businesses that will help them to repay taxpayers' money. Estimates suggest that the businesses RBS has been told to offload - including its insurance arm and its commodities trading business - will immediately reduce its annual earnings by much more than £1bn ($1.7bn).
Under another European Commission (EC) rule, government-supported banks are prevented from paying coupons on, or calling their hybrid capital instruments, raising their future cost of capital and putting them at a disadvantage to banks that did not take government money.
There is a chance Ms Kroes' vigorous defence of competition could instead slow the re-privatisation of the banking system, entrenching government participation in the banking institutions she wants them to exit. She should be careful that EC policy does not smack of punishment rather than cure.
