Saturday, 26 April 2008

The special liquidity scheme is state aid



Perhaps it is just wishful thinking, but the Bank of England’s £50 billion special liquidity scheme might run into trouble with the European Union. The EU has tough rules on state aid, which forbids governments from using taxpayer’s resources to prop up ailing domestic industries.

As Anthony Woolich, head of competition for LG, the business law firm in London said:

“It seems to me that this is prima facie state aid because this scheme gives banks operating in the UK an advantage over other European banks operating outside the UK"

In their press release announcing the scheme, the Bank of England all but admitted that this was state aid. The scheme is “designed to improve the liquidity position of the banking system and raise confidence in financial markets”.

To achieve these objectives, the BoE has organized a transfer of high-quality government debt for dubious high-risk commercial bank mortgage debt. The Bank of England did not justify this state intervention in terms of financial stability. The bank claims that all the banks are just fine; all they need is a helping hand from the public sector start growing again.

There are good reasons why state aid of this sort is forbidden. The rules ensure equal competition throughout Europe, allowing companies to compete on equal terms, which ultimately results in lower prices for consumers. The rules also protect taxpayers from unscrupulous politicians who would rather use taxpayers money to protect their sorry careers rather than make difficult but correct decisions to protect the public interest.

The European Union can stop this farrago. The question, however, is whether they would choose to do so. Policymakers across Europe, including some working at the European Commission, are beholden to the financial services industry. They might find it easier to quietly let this transgression pass. Besides, the ECB are quietly propping up banks in Spain and Ireland.

Nevertheless, some European banks behaved more reasonably than our reckless banks. Perhaps, one might complain and initiate a legal challenge that could put an end to this silliness.

We can only hope.

9 comments:

CWS said...

Go in EC, make my day

Anonymous said...

Good point, but ultimately futile. Whatever next? Should the SEC start jailing CFOs who flagrantly lied in their SOX declarations every quarter over the non-recourse nature of SIVs? Should the FBI jail all those mortgage fraudsters who signed their name to stated income loans.

While I entirely agree with you on your point, I think the prisons aren't big enough to deal with everyone who deserves to be put away for this.

Personally, I'd settle with just Gordon Brown getting life with no possibility of parole.

Nick

OldFTB said...

I wondered when someone was going to pick and run with this. Nice work Alice.

Anonymous said...

Gordon Brown has moobs.

Alice Cook said...

This measure really gets me. If a bank is illiquid and about to go under, then there should be some kind of response to prevent a system collapse. However, this SLS isn't that. It is a programme designed to protect banks from the consequences of bad decisions.

It is unlikely that the EC would stop it. I know that. However, it is state aid of the worst sort.

Alice

aSteve said...

I'm not as convinced as you are that the SLS is a mechanism to protect banks from the consequences of their decisions... but it definitely could be - depending upon the fine print.

My hunch is that the SLS carries such a penalty from a capital perspective that only extremely desperate banks will use it. I think this explains why the sum on offer is spectacularly large - with "more available" if needed.

I'm looking forward to finding out how much has been swapped by this scheme. I suspect that it will carry a stigma - rather like last-resort borrowing... a haircut of 30% of the assets a bank holds would be enough to bring any bank operating in the UK to insolvency.

I'm pleased that we're constrained by Europe - I never thought I'd think that - but I am. EC regulation has done a great deal to coerce Northern Rock to scale-down sooner than the government would have liked...

My own verdict on SLS is still out... I don't (yet) consider it to be the calamitous bale out that you present it as being.

Anonymous said...

RBS solution is the only game in town as weeks go by .
Tax payers who own RBS shares are leeches and those who are not GB taxpayers should not get any help what so ever .
Whats the percentage??

eh said...

An interesting take and post on the subject.

J said...
This comment has been removed by a blog administrator.