Bank rescues risk skewing competition

DAVOS, Switzerland (Reuters) - State intervention to rescue banks and prevent a collapse of the financial system was essential but may inadvertently skew competition between lenders, senior executives say.

Governments across the world have rushed to inject much-needed capital into faltering banks to avoid a complete financial meltdown following the collapse of U.S. investment bank Lehman Brothers in September.

But the nationalization and part-nationalization of several banks in major countries has had consequences for banks that did not initially need state aid, who are now facing market pressure from state-backed competitors.

“It may be inadvertent, but there is no way that government involvement doesn’t temporarily alter the competitive balance in the various industries that they get involved in,” NYSE Euronext Chief Executive Duncan Niederaurer said at the annual meeting of the World Economic Forum.

“Once you support and guarantee bank A in one country, it is sort of incumbent on you to support and guarantee bank B and C.”

“If not you could inadvertently create the sense that the bank you went to rescue is just a safer place than the ones you did not rescue, even though the other banks didn’t need the money.”

Top executives say that what was started as a welcome response to a market shock could risk creating an uneven playing field in the long run.

“In the short term it is an absolute necessity to save some banks, to support them,” said Georges Pauget, Chief Executive of France’s largest retail bank Credit Agricole.

“But in the long term, we will have to be very careful about the consequences of such intervention.”


Since major banks started to reveal that they were holding billions of illiquid assets on their balance sheet, regulators, market analysts and ratings agencies have been calling for higher capital buffers.

Shares in banks like Britain’s Barclays and its peer HSBC, which had been initially viewed as strong enough to survive the crisis without needing any additional cash, have been under enormous pressure as the market started to demand they raised more capital after competitors were rescued.

The state-backed recapitalizations, bankers say, have helped create a vicious circle for banks, as well as some confusion.

“People have not been able to understand if the regulatory capital level reached by certain banks was the right level for the industry as a whole or just for a certain specific situation in view of certain problems,” said Sergio Ermotti, Deputy CEO of Italian bank UniCredit

“This has created an uneven playing field.”

For example in Switzerland, shares in Credit Suisse, which with a Tier 1 ratio of about 13 percent is one of the best capitalized bank in the world, have came under some pressure from state-rescued competitor UBS.

Bankers are welcoming steps by regulators to address the pursuit of ever higher capital ratios while the crisis continues.

European Central Bank Jean-Claude Trichet said banks would be ill-advised to raise capital during the turmoil as this would make matters worse.

“It is not our position, and we will do all that we can to pass the message that we are not in agreement with that,” Trichet said as he addressed a WEF panel. “That would augment the pro-cyclicality of the present period.”

Adair Turner, chairman of Britain’s Financial Services Authority, said overall capital ratios are bound to come down from the current very high levels, although specific requirements for certain segments of the banking sector may be toughened.

While regulators discuss ways to build a new financial architecture for banks, the market continues to remain tight making it tougher for independent players as they wait for governments to retreat.

“We do see value for our proposition both for investors and customers in being a clearly independent international bank, unquestionably,” said Stephen Green, Chairman of HSBC.

“I believe that over time that state intervention that has taken place as part of recapitalization of various banks will gradually be rolled back, gradually state ownership will have to be sold down as... institution return to health.”


Editing by Erica Billingham