1. Competition Policy in Times of Financial Crisis 7 April 2009 Mark Friend and Louise Tolley

2. What this seminar will cover  Introduction - setting the scene  Overview of State aid regime  Rescue and restructuring aid  Northern Rock  B&B  EU interventions in the financial crisis  Banking Communication 13 October 2008  Recapitalisation Communication 5 December 2008  Impaired Assets Communication 25 February 2009  UK financial support measures 13 October 2008  Competition v. financial stability  Relaxation of antitrust enforcement?

3. Setting the scene EU policy in a nutshell:  On State aids:  “Controlling subsidies to banks at this time protects both taxpayers and the banks that are sound and able to operate without government intervention.”  On mergers:  “Nor do we want to see two struggling banks cripple each other through a botched merger, or create another bank that is too big to fail.”  On cartels:  “We are crystal clear that cartels are harmful no matter what current economic growth rates are.” Remarks of Commissioner Neelie Kroes, 30 March 2009 from “the crisis and the road to recovery”.

4. Overview of State Aid Regime (1)  Art. 87(1) EC prohibits aid which entails: Transfer of State resources Conferring selective advantage On one or more undertakings Distorting competition Affecting trade between Member States

5. Overview of State Aid Regime (2)  Selective v. general measures  “Advantage” v. “market economy investor” principle  Member States must pre-notify aid (Art. 88(3)), else unlawful under EC law and may be unenforceable under national law  Commission can order recovery of unlawful aid  Commission decides whether aid is compatible with common market (Art. 87(2) and (3))  Phase I clearance for non-problematic aids  Phase II ‘serious doubts’ cases

6. Application to the financial sector  Two alternative grounds for approving aid to banks Art. 87(3)(c)  Permits aid to facilitate the development of certain economic activities… where such aid does not adversely affect trading conditions to an extent contrary to the common interest  Legal basis for aid to failing banks Art. 87(3)(b)  Permits aid to promote serious economic disturbance  Legal basis for aid to healthy banks

7. Rescue and Restructuring Aid The R&R Guidelines  Rescue aid  To keep failing firm afloat pending restructuring or liquidation  Must be warranted on grounds of serious ‘social’ difficulty  Reversible liquidity support permitted for up to 6 months  Must then be repaid, or submit a restructuring/liquidation plan  Restructuring aid  Must lead to long term viability  Undue distortions of competition to be avoided  Limited to minimum necessary

8. Northern Rock Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 …Jan 09 NR unable to meet its funding needs Aid notified Aid approved as rescue aid UK notifies restructuring plan Commission opens in-depth investigation NR steps up mortgage lending  BoE emergency liquidity assistance Treasury guarantee on deposits/liquidity facility

9. Bradford & Bingley (1) Mid-Sep 0826 Sep 08 27 Sep 08 28 Sep 08 29 Sep 08 30 Sep 08 1 Oct 08 Ratings downgrade 5 yr CDS spreads reach 1339 bps / share price below 20p FSA informs B&B that authorisation to accept deposits will cease 29 Sep Two bids received (Abbey offers £612m for retail deposits and branch network) B&B Transfer Order takes effect Aid notified Aid approved

10. Bradford & Bingley (2)  Who are the potential aid beneficiaries? Retail depositors? B&B? Abbey? The transferred activity?

11. The Banking Communication 13 October 2008  Signifies move towards a more flexible approach  Commission guidelines recognise that Art. 87(3)(b) can be applied to systemic crisis  General principles of R&R Guidelines still apply  Application limited to banking sector  Endogenous v. exogenous problems: is the dividing line always clear?

12. What does the Banking Communication allow?  Guarantee schemes  Eligibility  Types of liability covered  Duration  Remuneration  Behavioural conditions

13. What does the Banking Communication allow? (2)  Recapitalisations:  Eligibility  Proportionality  Remuneration  Haircuts  Monitoring  Controlled winding up  Other forms of liquidity support

14. Recapitalisation Communication 5 December 2008  Further guidance requested by industry  Supplements the Banking Communication  Contains principles governing different types of recapitalisation:  Recap at current market rate  Generally no additional safeguards needed  Temporary recap of fundamentally sounds banks  Price can be below market rates, but remuneration must factor in risk profile of bank  Recap of banks not fundamentally sound  Higher remuneration, strict behavioural safeguards and compulsory winding-up / restructuring

15. Impaired Assets Communication 25 February 2009  Aim is to help Member States deal with “toxic assets” on banks’ balance sheets: to avoid “zombie banks”  Ensures consistency of asset relief measures across Europe, and compliance with State aid rules  Again, supplements the Banking Communication  Type of asset relief scheme will be a choice for the Member State:  Purchase assets and put in central “bad bank”  Guarantee bad assets on bank’s balance sheet  Asset swap  Nationalise banks and take direct control over assets

16. UK financial support measures  Three measures approved on 13 October 2008: SchemeMeasureLimit Bank recapitalisation scheme New Tier 1 capital to bolster balance sheets (6 months) £25bn for purchase of shares plus further £25bn support Wholesale funding guarantee scheme Guarantee for short/medium term debt (6 months) £250bn Special Liquidity Scheme Extension of collateral accepted for £ and US$ money market operations £200bn

17. And before we leave State aid…  …what about the real economy?  17 December 2008: Commission published Communication on Temporary Framework for supporting access to finance in the current financial crisis  Aimed at the wider economy, not just the financial sector  Examples in the UK:  Scheme to grant up to €500,000 for businesses in difficulty due to the credit crunch  Temporary measures to grant loan guarantees and interest rate subsidies  Scheme to support lending to businesses

18. Competition v. financial stability (1)  The role of UK merger control: 1.Banking (Special Provisions) Act 2008: allowed HMT to broker mergers – disapply “any specified statutory provision or rule of law” (see Bradford & Bingley) 2.Similar provisions now in Banking Act 2009 3.UK merger control: intervention by the SoS  Allows SoS to balance competition and public interest – can refer to CC where OFT finds no competition concerns, or clear notwithstanding competition concerns  Pre-Lloyds / HBOS, intervention allowed on grounds of national security or ‘media plurality’  Order introducing ‘financial stability’ as a third ground  Lloyds / HBOS cleared despite OFT finding competition concerns 4.Likely to see more “failing firm” arguments in merger cases?

19. Competition v. financial stability (2)  The role of EC merger control:  “The Commission is committed to continue applying the existing rules, taking full account of economic environment.” (Neelie Kroes, 6 October 2008)  Potential for derogation from standstill obligation to allow immediate implementation of transactions subject to rescue measures  Not seen this in practice thus far  Commission’s preferred approach is to take structural measures that clear balance sheets, restructure or wind down banks, not for ailing banks to merge:  “two turkeys do not make an eagle”

20. Relaxation of antitrust enforcement?  Antitrust enforcement remains vigorous in the EU  Commission policy is to take hard line on cartels  “They cause billions of dollars of direct harm… and by cracking down hard on one cartel, we estimate that we stop another five.” (Remarks of Commissioner Neelie Kroes, 30 March 2009 from “the crisis and the road to recovery”)  Suggests no relaxation in fining policy  What about horizontal cooperation agreements, e.g. to reduce capacity?

21. Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.