Brussels tables bank crisis rules to avoid 'chaos'

BRUSSELS - As EU governments put aside hundreds of billions of euros in rescue plans to shore up their financial sector, the European Commission has tabled fresh guidelines so that the union's economy does not "descend into chaos."

According to the rulebook published on Monday (13 October), the commission recognises that member states may consider it necessary to adopt appropriate measures to safeguard the stability of the financial system.

But such measures, it says, may not result in unnecessary distortions of competition between financial institutions operating in the market or negative spillover effects on other member states.

"A jungle is what we would get if we suspended or abandoned competition policy," EU competition commissioner Neelie Kroes said on Monday, according to Reuters.

To prevent "chaos," the EU's competition watchdog will thoroughly examine whether a given rescue plan is in line with principles such as non-discrimination - meaning that a support scheme cannot be based on nationality, but must cover all eligible institutions.

In addition, measures must be limited in time and scope, while the private sector should also bear some responsibility and contribute to the cost of a guarantee scheme and the cost of assistance granted.

Finally, member states must ensure that those enjoying state support do not abuse it by for example engaging in aggressive market strategies and that later, they will undertake necessary restructuring.

Irish and UK schemes win Brussels' approval

Ireland was the first country to prompt the European Commission to remind EU governments that state aid rules need to be respected even in time of crisis.

The Irish government suggested blanket guarantees of deposits in all six Irish banks - a move that ruffled feathers in Brussels, Germany and the UK due to its discriminatory potential within the Irish market as well as its effect on other EU countries' banks.

After "intensive" contacts, the commission gave the green light to the country's "revised" rescue plan, with Ms Kroes saying "this case illustrates how we can work together with member states to design measures that help to solve the financial crisis while avoiding negative effects on other member states' banks."

The EU executive body also gave its backing to an "innovative and well-designed support scheme" tabled by London. "The scheme will contribute to the recovery of European financial markets, without creating undue distortions of competition," the commissioner said in a statement.