EU ok RBS UK bailout2 min read . Updated: 14 Dec 2009, 05:09 PM IST
EU ok RBS UK bailout
EU ok RBS UK bailout
Brussels: European Union regulators on Monday approved Britain’s bailout of Royal Bank of Scotland PLC but warned that they will intervene and demand more selloffs if the bank doesn’t shrink its operations by 2013.
RBS must offload British branches and its insurance, transaction management and commodity trading operations to raise funds and compensate for the competitive advantage it gained from a £20 billion bailout from the British government.
EU Competition Commissioner Neelie Kroes warned that she could call for more selloffs if RBS fails to meet balance sheet reduction targets by 2013.
“The commission will be able to intervene again and more divestments will be required," she said, sweetening her threat with wishing “a better and more sustainable future to this bank."
The European Commission also approved RBS to take part in Britain’s asset protection scheme, under which the state will cover 90% of potential losses from RBS assets once valued at £281 billion. RBS will pay the first £60 billion of losses and 10% of the rest.
Britain now owns 70% of the bank and will step that up to 84% after it buys £25.5 billion ($42 billion) of “B" shares in the bank to strengthen its capital.
It has promised RBS a second recapitalization of £25.5 billion and has set aside another £8 billion to support the bank if it runs into trouble — if its core Tier 1 ratio falls below 5% in the next five years. It has also granted tax changes worth up to £11 billion.
The EU’s executive said the asset protection program — essentially a costly subsidy to the bank — was necessary to remedy a serious disturbance in the British economy.
Reducing the size of the bank and making sure it pays part of the costs of the restructuring were crucial safeguards to limit distortions of competition and “moral hazard" — the danger that a company may take excessive risks if it knows it won’t have to pay for them, the EU said.
RBS will divest part of its business lending to British small and medium companies, a sector where it leads and has little competition. The new bank it will form will have a market share of 5% and more than 300 branches and 40 business and commercial centers.
The EU said this will allow either a new competitor to emerge or a smaller rival to boost its position.
Kroes said examining the RBS case was one of the most difficult of dozens of banking bailouts that the EU has dealt with to make sure that massive injections of capital to troubled banks don’t damage the entire market by rewarding reckless risk-taking before the financial crisis.
Regulators blamed RBS’ “strategy of aggressive expansion" for its problems — including the expensive purchase of ABN Amro’s wholesale operations in 2007 and risky lending financed by borrowing money from other banks on wholesale markets.
This brought RBS “to the verge of collapse and caused very important impairments and write-offs in its assets" last year when lending between banks froze on worries over the ability of many bank borrowers to pay back huge loans.
RBS says the risk of further losses is receding as market conditions improve — but economists warn that the road ahead is rocky as Britain remains in recession.