Europe to Probe Alleged Collusion on Rates

LONDON -- The European Community plans to launch an investigation to determine whether commercial banks in the 12 member states are colluding to maintain high interest rates.

The plan follows a mounting political row in Britain over claims that the nation's big banks are squeezing small companies with high rates.

Britain's Treasury Secretary, Norman Lamont, is calling in the chairmen of the big banks for talks as part of the government's investigation of growing assertions that banks are operating a lending cartel in business lending.

Smaller Corporations Complain

Though the British prime rate has fallen from a high of 15% last October to a current 11 1/2%, smaller corporations have widely complained that the banks have increased their interest margins, effectively neutralizing the impact of this decline.

The British government is using lower interest rates as its main monetary tool to kick-start the recession-hit British economy. Business failures have been running at several hundred each month.

Borrowing Costs Said to Be High

But some businesses say banks have raised their spreads over prime to as much as 7% in recent months, raising borrowing costs to 18 1/2%.

National Westminster Bank PLC, whose chairman, Lord Alexander, was the first to be questioned by the government, announced that it will not cap rates to business borrowers at 18%.

The bank, the biggest lender to small businesses, with an $18 billion corporate loan book, said its average extra margin over prime to borrowers would be about 3%. Barclays Bank said its average margin was below 3 1/2%, while Lloyds Bank said its highest margin was 5.9%. Midland Bank declined to give details.

Bankers have privately said that higher margins are needed to reflect lending risks and rebuild earnings after the deterioration in profitability last year, when the big banks collectively set some $5 billion aside against soured corporate loans.

A National Westminster spokesman said, "There is an increasing amount of risk in lending to small business."

The government has threatened the banks with a full antitrust investigation if there's evidence to suggest collusion by banks to maintain high rates.

But a European Community inquiry would be much more comprehensive. The competition directorate in Brussels has powers to seize documents and impose fines, industry analysts said.

At this stage, Europe's commissioner for financial services, Sir Leon Brittan, is to write to banking associations throughout the community, seeking evidence of any interest rate agreements.

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