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

Bruce Lyons () and Minyan Zhu

Journal of Industry, Competition and Trade, 2013, vol. 13, issue 1, 39-66

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

Keywords: state aid; competition; banks; European Commission; F15 (integration); G21 (banks); L49 (antitrust policy—other) (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10842-012-0145-6

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