Bank rescues risk skewing competition

Fri Dec 18, 2009 2:33pm EST
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By Lisa Jucca - Analysis

DAVOS, Switzerland (Reuters) - State intervention to rescue banks and prevent a collapse of the financial system was essential but may inadvertently skew competition between lenders, senior executives say.

Governments across the world have rushed to inject much-needed capital into faltering banks to avoid a complete financial meltdown following the collapse of U.S. investment bank Lehman Brothers in September.

But the nationalization and part-nationalization of several banks in major countries has had consequences for banks that did not initially need state aid, who are now facing market pressure from state-backed competitors.

"It may be inadvertent, but there is no way that government involvement doesn't temporarily alter the competitive balance in the various industries that they get involved in," NYSE Euronext Chief Executive Duncan Niederaurer said at the annual meeting of the World Economic Forum.

"Once you support and guarantee bank A in one country, it is sort of incumbent on you to support and guarantee bank B and C."

"If not you could inadvertently create the sense that the bank you went to rescue is just a safer place than the ones you did not rescue, even though the other banks didn't need the money."

Top executives say that what was started as a welcome response to a market shock could risk creating an uneven playing field in the long run.

"In the short term it is an absolute necessity to save some banks, to support them," said Georges Pauget, Chief Executive of France's largest retail bank Credit Agricole.   Continued...