EU crackdown on big banks starts with ING

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An EU crackdown on banks too big to fail appears to have begun with ING having to sell its insurance and investment management business, as demanded by the European Commission.

In the EU executive’s boldest move yet, ING has been told to divest its insurance business, worth approximately 12-15bn euros. The bank has been asked to focus solely on banking in a break-up that will almost halve its balance sheet. 

The Commission’s move against the bank is causing a stir in the banking sector. Its demands are being interpreted by observers, and further interventions are expected in the coming weeks. Among the predicted targets are Lloyds Banking Group and Royal Bank of Scotland (RBS), whose restructuring plans are currently under scrutiny at the Commission. 

A spokesperson for RBS in the UK said the bank is currently in talks with the British Treasury and the European Commission, but did not know when to expect a decision from the EU. 

EU Competition Commissioner Neelie Kroes has made ING’s earlier restructuring plans completely redundant. The bank had planned to split its banking and insurance businesses into separate entities. 

Kroes’ demands have dealt a severe blow to the bank as they include the sale of its American online banking business, ING Direct USA. 

Kroes, who is coming to the end of her term, has long warned that state aid should not put national banks at an advantage. ING received a 10bn euro capital injection from the Dutch state and guarantees on 80% of its 27.7bn euro mortgage-backed securities portfolio. 

The restructuring of the bank is due for completion in 2013 and the sale will explore all options including initial public offerings, sales and combinations thereof, according to a statement from the group. 

“Splitting the company is not a decision we took lightly,” Jan Hommen, the group’s CEO said in a statement. 

Though the bancassurance model, merging insurance and banking, had proven largely successful, Hommen admitted the crisis called for a different approach. “Now, the widespread demand for greater simplicity, reliability and transparency has made a split the optimal course of action,” he said. 

While the situation on the financial markets appears to be improving, the full impact of the financial crisis on the real economy is now being felt. Banks are deleveraging and low investor confidence is leading to a credit squeeze. 

Though recognising the need for state intervention, the EU competition authority is engaged in negotiations with banks to scrutinise their allocations of state aid and restructuring plans. Banks will be expected to either downsize, pay back state aid or commit to a combination of both. 

The European Commission has adopted a temporary framework to give member states additional opportunities to tackle the effects of the credit squeeze on the real economy. Limited amounts of aid, guarantees and subsidised loans are among the measures available to banks. 

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