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European Commissioner for Competition Neelie KroesTHIERRY ROGE

Europe's bailed-out banks face a tougher task than U.S. peers in a battle to recover from the credit crisis, because more punitive EU state aid rules threaten to leave ruts in an already bumpy playing field.

Industry experts say the attempts by "steely" Neelie Kroes, the European Competition Commissioner, to rebalance the competitive landscape after vast state subsidies were handed to failed banks are significantly more stringent than those imposed in the United States.

"The Commission risks pursuing a policy which not only fails to achieve any benefits, but which is highly likely to make a bad situation worse, harming consumers, the banking industry and the economy at large," says Christian Ahlborn, a partner at top London law firm Linklaters, which advised bailed-out banks such as Lloyds Banking Group of the UK.

The outgoing Ms. Kroes has been single-minded in her crusade to make the financial industry "show some respect" to taxpayers, who have funded their bailout, and has told them brusquely: "Now is not the time for tantrums."

While U.S. sanctions have focused on dividend restrictions and caps on pay, giving banks more control over how to wean themselves off government support, Europe has forced banks to shed assets and shrink balance sheets by up to half.

Ms. Kroes has been applauded in some quarters for boldly taking on an industry has been notorious for its arrogance, for commanding some of the highest salaries in industry - and which is blamed for a credit crisis that destabilized economies.

"Brussels has done a far, far better job than local governments," Tim Linacre, chief executive of U.K. stockbroker Panmure Gordon, told the Reuters Global Finance summit in London. "I'd give Neelie lots of marks for what she's done."

But Irmfried Schwimann, a director at the financial services unit at the European Commission's directorate-general for competition, acknowledged after a lecture in Frankfurt recently that there was a more punitive approach in Europe than in the United States.

"The rescue actions in the U.S. did not take account of moral hazard to the same extent as in Europe," she said, adding: "Aid wasn't meant to make things easier for banks. If it gets too expensive, there's an incentive to get back to normal."

Bankers and some lawyers argue that sanctions imposed in Europe could hobble bailed-out banks trying to rebuild businesses, putting them at a disadvantage internationally.

The argument hinges in part on Europe's use of state aid rules, which are traditionally used when addressing bailouts in sectors suffering from overcapacity and where poor management is clearly to blame for bringing companies to their knees.

The latter undoubtedly helped destabilize banks such as Royal Bank of Scotland of the U.K. But the credit crisis, which threatened to topple top banks in countries such as Germany, Austria, Ireland, the Netherlands and Belgium, also spread like wildfire across the industry.

Forcing the industry to shed billions of euros worth of assets, imposing multiyear acquisition bans and pricing restrictions on remaining products could also unwittingly create pricing cartels. This would drive up the cost of loans for customers struggling to secure much-needed credit, some argue.

"In Belgium, for example, all major banks might end up with pricing restrictions - so you end up with a cartel, with higher prices for customers, that has been created by the Commission," noted Linklaters' Mr. Ahlborn.

Guido Ravoet, secretary general of the European Banking Federation, said it might not be appropriate to "punish banks that are on the path to recovery".

"This also leads to concern about a level playing field with the U.S. banks. The U.S. has had a much more liberal point of view towards regulating banks than the EU," he told Reuters on the sidelines of a financial conference in Frankfurt.

But critics say U.S. policy is also far from ideal. They accuse the United States of a strategy that can give birth to "zombie banks" - large institutions that can operate only because they are shored up by state funds.

Billionaire investor Warren Buffett has advised the U.S. government not to coddle companies that need bailouts to survive or preserve capital. "More sticks are called for" he said earlier this month.

Unsurprisingly, however, banks complain of unfair treatment on both sides of the Atlantic.





Robert Benmosche, the chief executive of bailed-out U.S. insurer American International Group, was sufficiently outraged by salary restrictions imposed by U.S. pay czar Kenneth Feinberg he is said to have threatened to quit.

U.S. companies that have received multiple rounds of government bailouts, such as investment banks Citigroup and Bank of America Corp, have also had to limit dividends to nominal levels.

And behind the scenes, executives have now to deal with a tough new stakeholder. The Federal Deposit Insurance Corp (FDIC), the independent agency that insures deposits in banks and thrift institutions, has reportedly pressed for Citigroup chief executive Vikram Pandit to be ousted.

But the firms are still run by their own management and have latitude to sell assets as they see fit, with a few exceptions.

"There is still a lot of government pressure on these companies, but it's more covert here than in Europe," said Bert Ely, a banking consultant in Alexandria, Virginia.

"Regulators don't have the same legal authority in the U.S. as in the U.K. and Europe," he added.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:10pm EDT.

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AIG-N
American International Group
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Citigroup Inc
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