How not to organise a bank rescue

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The Independent Online
If you think Barings is bad, just look at what Jean Peyrelevade, one of the disaster-prone merchant bank's non-executive directors, has to cope with at home. As executive chairman of Credit Lyonnais, he is presiding over what in UK terms would be the equivalent of rescuing Lloyds or Midland Bank using state funds. Much is being made of the contrast; the billions being sunk into Credit Lyonnais and the decision here in Britain to allow Barings to go to the wall. The two cases only bear superficial comparison, however.

Credit Lyonnais is already controlled by the government; only a minority stake is traded on the stock exchange, in the form of investment certificates. It is almost certainly true that if a similar disaster struck here, the UK Government would also orchestrate a bail-out of any of our top half dozen private sector clearing banks.

The difference from the Barings case, where the Government stood back and allowed the bank to go into administration, is that the big clearers have huge numbers of depositors and are at the core of the payments system.

If the money they hold on deposit is frozen or lost, it would be highly damaging for a very large number of people, including the other banks they deal with, some of which might be brought down as a consequence. That was not true of Barings.

But while it may be common ground between the UK and French governments that both would prop up a major deposit taker, where detail is concerned, Credit Lyonnais is rapidly becoming a textbook case of how not to organise a rescue. Despite all that has happened Credit Lyonnais has been left largely intact, deciding its own timetables for asset disposals, and in the latest scheme transferring tens of billions of francs worth of lossmaking loans into a new company underwritten by the state.

It is a situation the airline industry is only too familiar; the pricing and marketing of the efficient is undermined by state subsidised firms protected from the marketplace The European Commission may now open an investigation into state aid for Credit Lyonnais, after complaints from French rivals.

Excessive competition and ready availability of capital have too often been the real reasons behind bad lending. Bank rescues should be about short-term protection for customers, not the organisations themselves, which as likely as not deserve to be broken up, run down or sold.