Misguided asset sales heap further punishment on European taxpayers
There is no logic to the EU rules that force banks that received state bail-outs to commit to costly restructurings, as ultimately it is the taxpayers that lose out. Again.
The selling off of assets by bailed out banks, as required by EU state aid rules, has been a tortuous process. The UK’s Lloyds Bank has resorted to spinning off 631 branches into a separate entity, which will then be listed on the stock market, after it failed to find a trade buyer. A proposed deal with the UK’s Co-operative Bank collapsed at the 11th hour.
Dutch financial services company ING was bailed out in 2008 but its restructuring, which involved splitting its insurance and banking arms and selling non-European assets, is still not complete. In August, ING reached a deal to sell its South Korean life insurance unit to private equity player MBK Partners for which it is likely to record an after-tax loss of about €950m. Two previous deals for the company fell apart.
The question is not why is it difficult for huge international financial services firms to dispose of assets. The answer to that is simple. The market is soft, some of the assets (but not in the cases mentioned here) are impaired and there are enormous technical and IT difficulties in carving out assets such as bank branches. Last year’s rupture in the sale of 316 Royal Bank of Scotland branches to Santander was partly blamed on the difficulty of integrating IT systems.
No, the question is not why selling these assets is troublesome, but rather why the European Commission (EC) insists on these very specific types of restructurings in return for state aid, which in the early phase of the crisis came largely from national governments and not EU coffers.
It is hard to see how, if 40% government-owned Lloyds loses about one-sixth of its customer base and incurs a restructuring cost of £1.3bn ($2.03m) to £1.5bn – unlikely to be matched by the return from the flotation of the branches – that can in any way be good for the taxpayers who bailed it out.
The selling of valuable overseas franchises and the narrowing of ambitions to the domestic market – as has been the strategy of a number of troubled institutions, whether ordered to do so by the EC or simply to raise cash (for example, UBS selling its prized Brazilian Pactual franchise) – is also a step backwards in business terms in a globalising financial services market.
Former EC competition commissioner Neelie Kroes argued in a 2009 speech that, “the restructuring plans of KBC, ING and Lloyds will secure their long-term viability. They will also require each of these banks to contribute substantially to the financing of the restructuring. At the same time, the plans ensure that none of these banks will enjoy an unfair competitive advantage as a result of the very large-scale public support they have received.”
Lopping off parts of banks in a rather indiscriminate manner does not seem consistent with achieving either viability or early taxpayer repayment. On the issue of unfair competitive advantage, most of the bailed out banks have been paying high fees for funding guarantees and the use of asset protection schemes such that they cannot wait to get away from them.
As far as creating new banking players goes, the policy in the UK at least has been a miserable failure. Huge branch networks have proven an unattractive asset to new entrants who in the case, for example, of Metro Bank have preferred to start afresh. They are best left in the hands of the incumbents, which have the scale and the knowledge to use them effectively.
