COLUMN-ING decision is warning to Europe's banks: P. Thal Larsen

-- Peter Thal Larsen is a Reuters columnist. The views expressed are his own --

By Peter Thal Larsen

LONDON, Sept 16 (Reuters) - Steely Neelie Kroes is flexing her muscles. The EU competition commissioner's decision to extend a review of a deal between ING (ING.AS) and the Dutch government has reminded investors of the conditional nature of those European bank bailout packages that have not yet received her stamp of approval.

The decision will reverberate far beyond ING's head office in Amsterdam.

The thing that has caught the Commission's attention is the agreement that allows ING to offload most of a 27.7 billion euro portfolio of securities backed by U.S. mortgages to the Dutch government.

In valuing these securities, the government took the view that they would return 90 percent of their original value even if the U.S. economy took a severe turn for the worse. Ms Kroes, a former Dutch cabinet minister, suspects it was being too generous. [ID:nLF346783]

Her basis for believing this is unclear. After all, it is unlikely that the Commission has done the kind of detailed valuations on ING's portfolio that were requested by the Dutch government. It hired a specialist boutique, Dynamic Credit, to sift through the individual mortgages underlying each bond.

Nevertheless, the decision highlights the continuing uncertainty that surrounds those banks whose state aid proposals have yet to be approved by the Commission. These include Lloyds Banking Group (LLOY.L), the partially state-owned British firm created from the merger of Lloyds and HBOS last autumn. [ID:nLG192066].

In the rush to avoid a bank collapse, the British authorities ignored the competition concerns about the merger, which created a giant bank with a third of the market for UK mortgages and current accounts. The suspicion is that Ms Kroes is using state aid rules to undo some of the damage.

The irony is that ING's shareholders shouldn't lose too much sleep, even if Kroes does wade in. True the bank might face fresh losses if the Dutch government were forced to lower its price for the bonds. But JPMorgan analysts reckon it would be no more than 1 billion euro.

And even if the bond portfolio were just to be the hors d'oeuvre to a broader discussion about the restructuring plans (ING has also received a 10 billion euro capital injection from the state) it's hard to see what remedy she could propose that the group isn't already considering. ING's new chief executive, Jan Hommen, is already thought to be mulling a break-up.

That said, uncertainty about the terms of state support could be seriously unsettling for other banks, like Lloyds. Though companies and governments can challenge the Commission's decisions at the European Court of Justice, this process takes years, and the Commission wins more often than it loses.

Ms Kroes is, of course, right to argue that state-supported banks should be forced to shrink as a condition for receiving state aid. But this is easier for financial conglomerates like ING than for those which do not have separate businesses they can easily sell.

The Commission has already inflicted wounds on bondholders by forcing some banks that received state aid to skip dividend payments on hybrid debt. Equity investors cannot be sure they will be treated any better. For previous columns, Reuters customers can click on [LARSEN/] (Editing by Martin Langfield)