Bank Bailouts Come to Europe

The rush to save four banks signals a more aggressive policy stance. But Europe's many regulators will make it tough to form a coherent strategy

by Mark Scott

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This is an updated version of a story that first ran on Sept. 29.

In a stunning series of moves engineered over the weekend and announced Sept. 29, six European governments are collectively committing nearly $150 billion to rescue four troubled financial institutions. Coming on the back of the U.S.'s $700 billion toxic mortgage bailout plan (BusinessWeek.com, 9/28/08), which was thrashed out over the weekend but defeated in a surprise vote Sept. 29, the move likely foretells a more proactive approach among European politicians and regulators to combating threats to the EU economy.

With their high-profile moves to save Britain's Bradford & Bingley (BB.L), Belgium's Fortis (FOR.BR), Germany's Hypo Real Estate Group (HRXG.DE), and Iceland's Glitnir Bank government officials are changing the rules of the game in Europe. Until now their primary policy response has been to inject billions into the Continent's credit markets via central banks—but rarely to intervene on behalf of specific troubled institutions. Now policymakers in the EU and its member states are signaling a more aggressive stance that mirrors the speed of U.S. actions.

(On Sept. 30, officials moved again, pumping $9.2 billion into Franco-Belgian bank Dexia (DEXI.BR) in an effort to shore up its balance sheet. The coordinated multi-country bailout includes institutional investors and the governments of France, Belgium, and Luxembourg.)

"The entire financial system was coming under pressure, so of course European governments had to get involved," says Richard Portes, president of the Centre for Economic Policy Research in London. "The situation was becoming untenable; they had to respond immediately."

Saving Bradford & Bingley

The largest deal involves British mortgage lender Bradford & Bingley, whose shares have plunged 93% in the past year on concerns about its loan portfolio. Unlike in late 2007, when the British government dithered over plans to rescue ailing mortgage lender Northern Rock, regulators moved swiftly this time to nationalize Bradford & Bingley's £50 billion ($90 billion) in loans. At the same time, Spain's Banco Santander (STD) will pay $1.1 billion to assume Bradford & Bingley's 197 branch offices and £20 billion ($38 billion) in customer deposits.

Just across the English Channel, policymakers in Benelux spent the weekend hammering out a very different rescue package for banking giant Fortis, whose operations are concentrated in the Low Contries. The bank, one of the three institutions that took over and carved up Dutch investment bank ABN Amro earlier this year, saw its shares plunge 35% last week alone on concerns it was overleveraged from the $34.5 billion it spent on the deal.