EU Approves Lower Rates

The European Competition Commissioner, Neelie Kroes, has approved a new French aid plan as well as more flexible rates for some of the top banks of Europe. The aid will allow governments to recapitalize fundamentally sound banks at rates as low as 7% to encourage interbank lending and to encourage lending to businesses. The cost of capital is being reset to rates of 7 and 9 percent plus a premium based on a risk profile structured by the commission. The commission is simultaneously trying to create safeguards against unfair competition based on the use of government aid against banks not using government aid. Governments want to control the money being put into the hands of these banks by setting conditions for aid such as requiring banks to lend to companies and households by between 3 and 4 percent.

These actions call into question some of the techniques being used in the U.S. to save the U.S. banking system. Why were Bear Stearns and Lehman Brothers allowed to fail? The failure of large banks is constricting competition and giving too much power to too few banks. The EU's actions have built in safeguards to protect other banks and consumers against unfair competition by ensuring that banks don't use funds to "finance aggressive commercial conduct to the detriment of competitors who managed without state aide." More steps are being taken to ensure banks don't mismanage funds through built in risk premiums based on the risk profile of each bank. Banks are not treated the same on the basis of how well they have been managed. The U.S. seems to be just throwing money at any big bank or insurance giant (?) that asks regardless of poor performance. The EU's pro-competition measures are innovative in the face of undesirable competitive circumstances involving government money. The effects of these steps will give a more favorable picture of the banking environment in Europe once the crisis passes.

http://www.iht.com/articles/2008/12/08/business/08euaid.php