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Compensating Competitors or Restoring Competition? EU Regulation of State Aid for Banks During the Financial Crisis

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  • Bruce Lyons
  • Minyan Zhu

Abstract

We contrast the theory underpinning state aid for failing banks with that for failing firms in the non-financial sector. We argue that there is little justification for measures to ‘compensate’ rivals when the bank has been saved for reasons of systemic stability. The Commission’s approach to bank restructuring aid takes insufficient notice of this. Furthermore, the use of punitive divestitures is not the best way of addressing moral hazard. Worse, such divestitures can impede competition by creating weak rivals. We provide four detailed case studies to illustrate the problems. We conclude that the Commission provided a useful constraint in the midst of a crisis of unprecedented scale and complexity, but its approach could have been improved by more systematic attention to effective competition relative to the appropriate counterfactual. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Bruce Lyons & Minyan Zhu, 2013. "Compensating Competitors or Restoring Competition? EU Regulation of State Aid for Banks During the Financial Crisis," Journal of Industry, Competition and Trade, Springer, vol. 13(1), pages 39-66, March.
    • Handle: RePEc:kap:jincot:v:13:y:2013:i:1:p:39-66
    DOI: 10.1007/s10842-012-0145-6
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    References listed on IDEAS

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    1. Lawrence J. White, 2009. "Financial Regulation and the Current Crisis: A Guide for the Antitrust Community," Working Papers 09-11, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Vives, Xavier (ed.), 2009. "Competition Policy in the EU: Fifty Years on from the Treaty of Rome," OUP Catalogue, Oxford University Press, number 9780199566358.
    3. Bruce Lyons, 2009. "Competition Policy, Bailouts, and the Economic Crisis," CPI Journal, Competition Policy International, vol. 5.
    4. Davies, Stephen & Olczak, Matthew & Coles, Heather, 2011. "Tacit collusion, firm asymmetries and numbers: Evidence from EC merger cases," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 221-231, March.
    5. Collie, David R., 1998. "Trade policy under Bertrand duopoly with integrated markets: the pure strategy equilibrium," Economics Letters, Elsevier, vol. 60(2), pages 179-183, August.
    6. John Vickers, 2008. "The Financial Crisis and Competition Policy: Some Economics," Antitrust Chronicle, Competition Policy International, vol. 12.
    7. Damien Neven & Miguel Mano, 2009. "Economics at DG Competition, 2008–2009," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(4), pages 317-347, December.
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    9. Bruce Lyons, 2009. "Competition Policy, Bailouts and the Economic Crisis," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2009-04, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    10. David Collie, 2002. "Prohibiting State Aid in an Integrated Market: Cournot and Bertrand Oligopolies with Differentiated Products," Journal of Industry, Competition and Trade, Springer, vol. 2(3), pages 215-231, September.
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    Cited by:

    1. Fiordelisi, Franco & Mare, Davide Salvatore & Molyneux, Philip, 2015. "State-Aid, Stability and Competition in European Banking," MPRA Paper 67473, University Library of Munich, Germany.
    2. Ingrid Magda Rosca & Ana-Cristina Balgăr, 2015. "State aid contribution to restoring the European financial sector," National Strategies Observer (NOS), Institute for World Economy, Romanian Academy, vol. 1.
    3. European Commission, Directorate-General for Competition (Brussels) (ed.), 2016. "Ex-post evaluation of the impact of restructuring aid decisions on the viability of aided (non-financial) firms: Final report," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 130514.

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    More about this item

    Keywords

    state aid; competition; banks; European Commission; F15 (integration); G21 (banks); L49 (antitrust policy—other);
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other

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