Only EU is big enough to take on giant banks
October 28, 2009
 By Ann Crotty
Given the widespread agreement that the enormous size of global financial institutions was a major factor in the severity of the financial crisis, the European Commission's decision that ING had to significantly reduce its size shouldn't have surprised as many people as it obviously did.
Presumably, the fact that it did reflects the fears that all of us non-bankers share: that banks are a protected species; that because of their "special role", banks can do pretty much what they want, particularly if they are "too big to fail"; and that a government makes demands on banks at its peril. These are most of the reasons why we had a financial crisis. Once they do manage to achieve such enormous size, the banks become the taxpayers' problem as well as a huge challenge for governments wanting to enforce any sort of regulatory authority.
And, of course, being so big makes it so much easier for banks to justify paying out huge remuneration packages. It also guarantees that it is impossible for any board member, and, in particular, any member of the remuneration committee, to understand the level of complexity in the packages being awarded to employees for all the risks they are taking on behalf of the bank.
As we all now know, these are risks that involve absolutely no downside for the employees who are taking them - that's carried by the taxpayer - but that do have huge upside, which is picked up by the employee. It is moral hazard at its most chilling.
At the World Economic Forum in Davos early this year, a director of American International Group (AIG) replied, when asked why he didn't attempt to stop all the risk business being written out of the company's London office, that he hadn't really understood what they were doing. He had understood the steady profits that had flowed to AIG until the business imploded.
The most significant aspect of the decision that ING has to sell off all its non-bank and US businesses is that it was made by the EU's competition commissioner, Neelie Kroes. She was able to take the action as a result of the considerable state aid that ING had received at the height of the crisis. Hopefully Kroes, who is due to move from the post within months, will have set a precedent that will be followed by whoever succeeds her. Hopefully, too, this will encourage similar action by individual governments, not only within the EU but in the US.
At the time that individual EU governments were pumping in huge amounts of money to help their banks or forcing through supposedly life-saving mergers, the competition authorities were forced to the sidelines by governments stating that public policy outweighed competition issues. The difficulties created by the crisis and governments' response to it were discussed at length at the International Competition Network Conference in Zurich in June. The head of one European national competition network agency said he had been given a matter of hours to consider the competition implications of the largest bank merger in his jurisdiction and to look for alternative purchasers of the troubled bank. The merger went through on public policy grounds.
That it was down to Kroes to take the most decisive action to date lends credence to the suspicion that governments have been compromised by the power and wealth of these huge institutions.
It is significant that the initial response by analysts to ING's dismantling is that its banking business didn't realise too many of the promised synergies with its insurance operations anyway.
So maybe big isn't necessary after all.
|
|
