How weak do a nation's banks need to be to qualify for state aid? It is a question that the European Commission appears to be wrestling with as it ponders a French proposal to provide €10.5 billion ($13.6 billion) of loans to its top six lenders by the end of the month. A report in the Financial Times on Saturday claimed that the Commission, the European Union's financial watchdog, was considering blocking the aid because it would be used to increase the bank's lending books rather than dig them out of a financial hole. The report was denied by both Brussels and the French government, though talk from Brussels of "pulling out stops to resolve the situation" hints that there is indeed a problem.
Continue reading below
Paris admits its lenders don't need the money to survive but argues that without it they would be tempted to reel in lending to protect their capital base. That would hurt small business, the housing market, and consumers and inevitably deepen a looming recession. It is also clear that, by supporting lending, the French state is tilting the financial playing field in its bank's favor. The EU's competition commissioner Neelie Kroes could normally be counted on to stamp out such practices early. Yet even the normally fearless Kroes might balk at the potential fallout of blocking bank assistance in the middle of a global financial crisis. - Paul Whitfield
