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.