Journal of Industry, Competition and Trade

, Volume 13, Issue 1, pp 39–66 | Cite as

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

Article

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.

Keywords

state aid competition banks European Commission 

JEL classification

F15 (integration) G21 (banks) L49 (antitrust policy—other) 

Notes

Acknowledgements

The support of the Economic and Social Research Council is gratefully acknowledged.

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.School of Economics and ESRC Centre for Competition PolicyUniversity of East AngliaNorwichUK
  2. 2.ESRC Centre for Competition PolicyUniversity of East AngliaNorwichUK

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