The muscles from Brussels

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: Neelie Kroes has, according to one analyst in London, “cut through all the bullshit”. Europe’s competition commissioner has trod where national regulators dare not, by imposing harsh penalties on the banks that received the biggest bail-outs in Europe. On November 3rd Britain’s two monsters, Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG), got the treatment. In the preceding week ING, a Dutch insurance and banking conglomerate, surprised investors by announcing a break-up and a capital raising. Over the summer Germany’s Commerzbank and WestLB both agreed to tough penalties. Several more banks, including Dexia and KBC, both based in Belgium, and Germany’s Hypo Real Estate, are next in the commission’s line of fire.

Kroes is acting under a generous interpretation of her mandate. The objectives of reversing the damaging effects of state aid on competition and of ensuring that bailed-out firms have viable business plans are not controversial. But the commission’s apparent desire to address concerns over moral hazard by punishing firms that have been rescued by the state is much more provocative. National governments have so far done precious little to tackle this issue. That partly reflects their defence of national champions, but also a reluctance to start messing about with big banks while the supply of credit to the economy is still under threat and while they still need to raise more equity from private investors.

The two big German restructurings were arguably the most straightforward. Both Commerzbank and WestLB will shrink their balance-sheets by about half from their peak (see chart). It was relatively simple to identify those bits of the banks that were sick, such as property, or sub-scale, such as international operations.

ING will shrink dramatically, too. About half of the reduction in its balance-sheet will come from offloading its insurance operations. It is hard to see how this improves either competition or the firm’s viability, but it does at least chime with the views of many investors that ING’s conglomerate model is too unwieldy.

The other zombies are harder to deal with, as the British examples show. The disposals being forced on RBS owe little to competition or viability concerns and quite a bit to the punishment motive. RBS will offload peripheral operations—such as insurance and its commodities unit—that make money, are healthy, and which it might otherwise have sensibly retained.