Joaquín Almunia Vice President of the European Commission responsible for Competition Policy Financial stability, a level playing field in Europe and a healthier financial sector: the role of competition policy. European Banking Federation Brussels, 4.11.2010

Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

Financial stability, a level playing field in Europe and a healthier financial sector: the role of competition policy.

European Banking Federation

Brussels, 4.11.2010

Ladies and gentlemen,

I’m very glad to attend this dinner of the European Banking Federation, thank you very much indeed for your kind invitation.

And, of course, many thanks to Alessandro Profumo for your words and your excellent cooperation during the past years, both as CEO of Unicredit and President of the EBF.

I would like to take this opportunity to give you my impressions regarding the role of competition policy during the crisis and how I see the exit from it.

Two years ago, the entire financial sector was in jeopardy. Governments in Europe and around the world had to take unprecedented measures to support the banks and to prevent catastrophic spill-over effects in the real economy.

That the banking crisis could have such profound effects on the real economy showed the extraordinary importance of the banking sector. And also explains its responsibilities vis-à-vis the whole society.

That the banking crisis could have put the real economy in so much danger showed the extraordinary importance of proper regulation and supervision of the financial sector. And the existence of market failures.

The role of the European Commission was, and remains, to ensure financial stability while safeguarding the real economy and the single market. From the competition and state aid standpoint, we did this by acting quickly to give legal certainty to the support measures given by Member States, and by making possible that businesses and families had access to credit, even in this difficult period.

Given the grave context, we needed to quickly put in place a new set of rules using an exceptional legal basis, for exceptional aid, to help in exceptional circumstances, using Art 107(3)(b) of the Treaty.

The condition we estrablished was to maintain a level playing field and ensure that the measures adopted by Member States would not distort the Internal Market. Uncoordinated national action would have seriously undermined international financial stability. By trying that the EU Member States played as a team, we avoided subsidy races, made banks pay the price for excessive risk taking, and prepared the basis for an effective exit strategy.

Now that the worst is hopefully behind us, exit from the crisis is a priority for the Commission. As does ensuring that this never happens again.

Looking back, I hope you agree that our State aid policy played a crucial role in addressing the crisis. Even in the worst phase of the crisis, we managed to adapt EU State aid rules to the exceptional circumstances but not be pushed aside, but adapted to an exceptional situation.

In this vein, we adopted four important decisions:

In October 2008, the “Banking Communication” setting the conditions for a level playing field to re-start the interbank market ;

In December of the same year, the “Recapitalisation Communication” tackling the need to recapitalize banks and address solvency issues and access to credit for the real economy;

In February 2009, the “Impaired assets Communication” providing a framework to deal with the problems of toxic assets; and

In July 2009, the “Restructuring Communication” providing clarity on how the Commission examines the restructuring of banks so that they can return to long-term viability, share the weight of the cost of their rescue, and address any distortions of competition resulting from the large amounts of aid the banks received.

Our aim with this package was three-fold:

– to preserve financial stability;

– to maintain a level playing field; and

– to encourage that viable banks can lend again without State support.

In terms of specific decisions we took, the list is long and reflects the substantial work undertaken:

– we approved:

– 15 recapitalisation schemes, 8 of which are still in place;

– 2 impaired-asset schemes in Germany and Ireland;

– 6 schemes covering banks’ liquidity, 5 of which are still in place;

– 21 guarantee schemes, 12 of these renewed until 31.12.2010.

– when it comes to individual decisions we have been also active:

– 44 rescue aid decisions on individual cases have been taken so far, 27 of which have been closed with a final decision:

– in 23 cases the decision was positive upon a restructuring of the institution;

– in 3 cases the decision was positive upon liquidation of the institution.

– in 1 case (Banco Privado Português) the decision was negative, with a recovery of aid.

17 cases are still pending.

From 2008 to August 2010, the Commission authorized interventions for a total of about € 1 trillion, of which about 677 billion were used.

The Commission authorized a further € 3.6 trillion in guarantees, of which about € 1.6 trillion were used.

These amounts are unprecedented, amounting to approved measures of some 25% of EU GDP. And used funds of over 10%.

We have carried out substantial work, and are pleased with the results so far. But work is still in progress. This is why I would like to now turn to some of the pending challenges.

Our work ahead will focus on the much-needed restructuring of the financial sector. Important decisions should be adopted in the coming months. Allow me to mention only two examples, which I consider the most difficult ones: Ireland and Germany.

Ireland has been particularly hit by the financial crisis. Apart from the drying up of access to wholesale funding, Ireland and the Irish banks had to face the collapse of the Irish property market and a considerable downturn of the economy. All the banking system –with the exception of foreign owned entities- were affected. As the bill for the rescue of the Irish banks has increased, so has the pressure on Irish sovereign debt.

The Irish authorities responded to the crisis by providing guarantees, an asset relief scheme (NAMA) and recapitalizations. The scale of their intervention was enormous. The Commission has authorized 286 billion Euros of support measures, over 170% of Irish GDP equivalent to 60.000 Euros per person.

The Commission is now in the process of assessing the restructuring plans of Allied Irish Bank, Anglo Irish, INBS and EBS. The restructuring plan of Bank of Ireland was already approved in July 2010.

In dealing with the Irish financial entities, the Commission needs to balance the necessity of addressing the distortions of competition caused by the large aid granted to Irish banks with any financial stability concerns that arise.

Unlike Irish banks, German banks suffered mostly from their exposure to foreign investments. This is mainly the result of the low profitability of their domestic retail and commercial banking activities –some of them with serious problems in their business models- which led them to venture into low margin high volume business at a large scale. Several public and private banks required bail-outs by the Government. Beside IKB, Commmerzbank and Hypo Real Estate, this concerned a number of Landesbanks: Sachsen LB, Bayern LB, LBBW, HSH Nordbank and WestLB.

Again, the total authorized measures were extremely high –over 615 billion Euros, but obviously a smaller proportion than in Ireland: around 26% of the German GDP.

Apart from Hypo Real Estate, for three Landesbanken our investigation is still open. These banks, all of which received high amounts of aid, need restructuring plans to be addressed by way of an in-depth restructuring and re-orientation of their activities. Only when the viability of the restructured entities is warranted the efforts of the German taxpayers and the distortions of competition produced by the use of public money can be justified.

The German case is different to the Irish one in many aspects. Among others, by the fact that in Germany the financial resources to tackle the restructuring are much bigger, whereas on the other hand, the need to change the business model of some of the entities receiving public support is more evident.

As you see the work ahead is still plenty and the Commission counts on the close dialogue it has with Member States’ governments and with individual stakeholders.

What is next?

After two years of the application of a specific crisis regime, we need to progressively exit from this. We are now preparing a gradual return to normal market functioning for the financial sector. Of course, the remaining possibility of renewed stress is a valid reason to proceed with care and caution in the exit process.

In May 2010, a first step was made by requiring that for guarantees granted by after 1st July, the beneficiary banks submit a viability plan and pay an increased fee. Some flexibility is nevertheless foreseen in the implementation of these new conditions when the economic situation of the Member State justifies it.

My views for the year to come are to progress on the same path. In this respect, my current idea is to extend the crisis regime until the end of 2011 while removing the distinction between fundamentally sound and distressed banks that was based on the amount of aid received. This means that, as of 1st January, every bank in the EU requiring the support of a Member State under the form of capital or impaired asset measures will have to submit a restructuring plan.

At the same time, we are working on defining the new rules for rescuing and restructuring aid for banks. My intention is for this work to be finalized and to change over to new normal rules from 1 January 2012, market conditions permitting.

Of course, a lot of work is being done in parallel. From the new regulatory regime –including Basel III integration in our Capital Requirements Directive- to the future resolution regime, that should provide a coherent framework for the future implementation of our restructuring rules.

And, last but not least, 1st of January the new European supervisory authorities and the Systemic Risk Board will start working.

More generally, the new economic governance based on our recent proposals and the conclusions of the Van Rompuy task force will improve the way the Economic and Monetary Union works. And the next G-20 summit in Seoul must reach positive conclusions to advance in the orderly adjustment of the global imbalances, mitigate the present tensions in the exchange rates markets and reduce the risks of new bubbles, in particular in the emerging economies.

Though there are promising signs of recovery, we are still living in an uncertain environment. Growth is weak, unemployment high and the repair of our financial system is an unfinished task. There is still a long way ahead.

However there is a lot more work to be done.

We still need to ensure a proper exit strategy from the exceptional State aid regime that we have been living with for the last two years.

And we need to ensure that the causes of the crisis are properly addressed. This will mean better regulation of the financial sector, and it will mean a curb on the excesses that some of banks have engaged in, in recent years.

Nobody can forget what has happened, and why it happened. Everybody should draw the lessons of this crisis. All of us are obliged to take the responsibility to avoid the same mistakes that caused this mess.

The banking sector had a key role in the development of the crisis and now should play a key role supporting the exit from it. The effects on the real economy of the crisis in the banking sector prove beyond any doubt that the investments financed by the banking system are a fundamental part of a well functioning economy. Therefore, reforming the banking system is warranted beyond any doubt.

Without the support of a viable and solvent banking sector, no sustained recovery is possible.

At the same time, no-one can deny that part of the activities carried out by the banking sector were not investments but were simply gambling. It was this gambling that threatened to bring down the world economy. Everyone here – both public and private sector – has a responsibility to ensure that this never happens again.

Citizens are vigilant.

Taxpayers, unemployed people, SME’s ….. All of them are watching us and wondering how we finish the work and set in motion the right strategy. All of them demand a fair burden sharing and the assumption of everyone’s responsibilities.

All of them are asking public authorities to be strict and to react against the abuses that took place in the past.

Let’s listen to them.

We must take decisions, at the EU and the global level. We request you to cooperate.

I’m confident your answer will match our expectations.

Thank you.

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