Over the weekend, it became clear that UBS agreed to buy Credit Suisse after a hectic weekend of negotiations brokered by Swiss regulator FINMA to safeguard Switzerland’s banking system and attempt to prevent a crisis spreading across global markets.
The news followed the collapse of Silicon Valley Bank and the rescue of First Republic Bank in the U.S. On Monday morning after the UBS/Credit Suisse agreement, there was still significant uncertainty as to whether other banks would be affected by the fall-out.
When authorities determine that a bank is failing, they use a process known as “bank resolution” to minimise the impact on depositors and the financial system. The EU, UK and Swiss rules essentially recognise three alternatives for the resolution of a bank: (a) a private sector measure; (b) normal insolvency of the bank; or (c) resolution by authorities.
While some may argue that Credit Suisse was still viable, the Swiss regulators clearly did not want to risk finding out, and therefore found UBS willing to acquire the bank. This would therefore be a private sector measure, where normal insolvency was not an option, but full-scale state intervention could be avoided.
It is clear that a transaction like UBS/Credit Suisse would normally fall to be scrutinised by the antitrust authorities of the UK, EU and Switzerland (and probably many other jurisdictions too). Indeed, wide-ranging competition investigations would be likely given that the two parties are large players in their sector and are close rivals (with Credit Suisse even going so far as to spy on UBS in a corporate scandal in 2019).
However, speed is of the essence in bank rescue operations. In this post, we set out how this tension is managed in these three jurisdictions, focusing on two key aspects: completion before approval, and whether mergers can be cleared that could restrict competition.
Completion before approval
All three jurisdictions have a process in place that can be followed to allow for the early implementation of a merger if this is necessary.
In the EU, a concentration falling under that Regulation shall not be implemented either before its notification or until it has been declared compatible with the common market. Large fines have been handed out to companies who fail to get clearance before implementing their merger. However, pursuant to Article 7(3) of the Merger Regulation (EUMR), the Commission may, on reasoned request, grant derogation from the obligation imposed in Article 7(1).
Derogation from the obligation to suspend concentrations is granted only exceptionally, normally in circumstances where suspension provided for in the Merger regulation would cause serious damage to the undertakings concerned by a concentration, or to a third party.
One case where such a derogation was granted is the acquisition by Santander of Banco Popular in 2017. In June of that year, it had become clear that Banco Popular’s liquidity situation was rapidly deteriorating, and the EU’s Single Supervisory Mechanism (SSM) declared the bank was failing or likely to fail. Banco Santander was found as a buyer of Banco Popular.
The acquisition met the EUMR’s notification thresholds. On the same day as the SSM’s decision, the parties filed a request for a derogation with the European Commission under Article 7(3) EUMR. That request was granted one day later, allowing the parties to implement the transaction without requiring them to wait until the Commission had reviewed and cleared the deal.
In Switzerland, if FINMA deems it necessary for two banks to merge for reasons related to creditor protection, FINMA takes the place of the Swiss competition authority (COMCO) (see Article 10(3) of the Federal Act on Cartels and other Restraints of Competition (“Swiss Cartel Act”)). At the request of the parties, FINMA may allow implementation of the merger at any stage and, if necessary, prior to the receipt of the notification (Article 17 of the Merger Control Ordinance). FINMA is required to invite COMCO to submit an opinion on the merger prior to its decision.
Given the significant size of Switzerland’s financial sector, it should be noted that in many cases, a merger between Swiss banks will require approval from other international regulators, including the European Commission and the UK’s Competition and Markets Authority (CMA).
In the UK, there is no mandatory merger notification regime. Therefore, merging parties can complete their merger without notifying the CMA. However, the CMA has four months after a merger is completed to open an investigation into the deal and may ultimately order the unwinding of all or part of the merger. When dealing with a completed merger, it imposes a standard hold-separate order that preserves the situation and keeps the two parties separate while it investigates, and it often does this on a worldwide basis in international deals. It will then grant specific derogations from that order as necessary, in a process that is labour-intensive for all concerned.
In practice, with a high-profile rescue operation of a bank (whether national or international), it will be important to contact the CMA early to agree on a flight path as the CMA has a wide discretion on various issues. It is possible that it would even decide simply not to open an investigation if it believes the risks to competition in the UK are low and its investigation would not add value to the work of other authorities. The merging parties may decide to submit a briefing paper to try to get the CMA comfortable without a formal investigation. We would query whether the CMA would be happy to give up the ability to force some divestments of business lines in order to protect competition in London’s financial district (or even to get a clear picture of what competition problems had been created by this shotgun merger between these arch-rivals).
Can a merger that restricts competition be cleared?
A more difficult question is whether mergers that damage competition could nonetheless be cleared in light of their necessity to avoid a bank collapse. As we will see, this is possible in all three jurisdictions, but subject to a level of uncertainty. The situation is clearest in Switzerland, followed by the UK. It may be the least clear in the EU.
As mentioned above, FINMA takes control of the process where it considers that the merger is necessary for creditor protection, with COMCO being consulted. The Swiss Cartel Act explicitly states that the interests of creditors may be given priority in such a case.
Therefore, it would appear that FINMA can clear a merger between two banks, even if it “creates or strengthens a dominant position liable to eliminate effective competition” (the Swiss merger control test).
In the UK, the Enterprise Act 2002 (“EA02”) is the legislation relevant to merger control. In certain situations, the EA02 gives the Secretary of State for Business the power to make a “Public Intervention Notice”, or PIN, in relation to a merger. They can do so, if they believe that it is or may be the case that a “public interest consideration” is relevant to a consideration of the relevant merger situation.
The effect of such a PIN is that the CMA must carry out a Phase 1 review of the case, but the Secretary of State is the Phase 1 decision maker. They decide whether a merger with a public interest consideration is referred to an in-depth review by the CMA, or whether it should be cleared, even where the CMA has identified competition concerns (likewise, the Secretary of State can refer the case to Phase 2, even if there are no competition concerns, in which case the Phase 2 review relates only to the public interest consideration).
An exhaustive list of public interest considerations is specified in section 58 of the EA02. In addition, the Secretary of State can believe that a certain consideration ought to be so specified. The Secretary of State has the power, under section 58(3), to modify section 58 for the purpose of specifying a new consideration. Therefore, a PIN can be made on the basis of a consideration that the Secretary of State believes ought to be included in section 58, and the Secretary of State can subsequently modify section 58 with a statutory instrument.
As secondary legislation, such statutory instruments are laid before Parliament and passed into law within 40 days unless either House annuls them. The role of Parliament is therefore limited: it can stop the statutory instrument passing into law, but it cannot amend it.
Up to 2008, section 58 only referred to public interest considerations relating to media plurality. In September 2008, in the middle of the financial crisis, British bank HBOS came under pressure from financial markets despite assurances from the regulator as to its liquidity. On 18 September, it was announced that Lloyds Bank would be acquiring HBOS. The UK Government made it clear that it would exempt the Lloyds/HBOS merger from competition law.
It did so by making a PIN to the Office of Fair Trading (OFT, the CMA’s predecessor) requiring the OFT to report to the Secretary of State by 24 October 2008. The Government then added “the stability of the UK financial system” as a further public interest consideration in section 58 through a statutory instrument laid before Parliament on 7 October 2008, which passed into law on 24 October, the same day as the OFT’s deadline. On that day, the OFT found that there were reasonable prospects that the merger would cause a substantial lessening of competition (the Phase 1 test). However, because of the PIN and the amendment to section 58 EA02, the Secretary of State was able to clear the merger.
Section 58 EA02 was only amended once more since then, to add “the capability to combat, and to mitigate the effects of, public health emergencies” in the Covid-19 crisis.
The PIN procedure can work both ways. It can be used by the Secretary of State to refer a merger to Phase 2 where there are no competition concerns, but the Government considers the merger to be against the public interest. It can also be used to clear a merger where there are competition concerns, as happened in the Lloyds/HBOS case.
Finally, it is important to note that a PIN may not be made in all banking mergers. Since the parties can complete the deal without requiring prior CMA approval, a PIN may only be necessary where CMA review would cast significant doubt on the ultimate outcome of the transaction, so as to undermine investor confidence.
The situation in the EU is less clear-cut, although the Commission has shown that it can be flexible enough to deal with the issues that have presented themselves so far. It is less clear what would happen in a case where there are competition concerns and no obvious remedies. The BNP Paribas/Fortis deal in 2008 is an interesting case study.
Fortis was a Belgian international bank, which together with Santander and Royal Bank of Scotland formed a consortium to buy ABN Amro of the Netherlands in 2007. Fortis came under significant pressure in the financial crisis, and in September 2008, it was bailed out by the Dutch, Belgian and Luxembourg governments. In October 2008, the Dutch government nationalised the Dutch parts of the bank and the Belgian government brokered a deal between Fortis Belgium and BNP Paribas, for the latter to acquire Fortis’s Belgian and Luxembourg operations.
The parties requested an Article 7(3) EUMR derogation from the Commission on 23 October 2008, which the Commission granted on 27 October, allowing the Belgian and Luxembourg states to commence a complex set of transactions, while the Commission reviewed the merger.
However, the Commission’s review was essentially a “traditional” competition review, which included BNP Paribas having to divest a Belgian subsidiary to obtain clearance. This case shows that in the EU, while a banking merger can be completed if a derogation is obtained, this by no means implies that the Commission will clear the merger unconditionally.
Similarly, the Commission granted a derogation in the merger between Santander and Banco Popular in 2017 (as mentioned above), but still carried out a full Phase 1 review of the deal, concluding that it did not raise competition concerns.
Though the European banking system came under significant strain in 2008, there has not yet been a case that has fully tested the flexibility of the merger control rules in the face of the potential collapse of a bank. While it is clear that deals to avert such a collapse can be completed after obtaining a derogation, there does not appear to be much scope for the EU executive to overrule DG Comp. However, the EU system is known for being open to discussions about flexible remedies to deal with competition concerns, and it is likely that that the Commission will seek to address issues as much as possible through conventional merger remedies, while taking the pressure off by allowing a derogation.
It will be interesting to see how the UBS/Credit Suisse deal, which is likely to meet EU thresholds, will be dealt with. There is no doubt that high level conversations will already be ongoing.
These cases are never straightforward and there will be plenty of stakeholders, customers and competitors who will have significant interest in the outcome.
Stijn Huijts and Tom Smith are Partners at Geradin Partners. They were previously Legal Directors at the UK Competition and Markets Authority. Photo by Edoardo Soares on Unsplash.