Published: Thursday, 16 Jul 2009 | 8:37 AM ET

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Crisis-hit banks seeking European Union regulatory approval for state aid may have to sell assets and curb their market and geographical expansion, according to a draft EU document on bank restructuring rules.

Competition Commissioner Neelie Kroes, tasked with ensuring fair play in the 27-nation EU, is expected to present the guidelines on July 23. The proposed rules would be in force until the end of 2010.

"Banks benefiting from state aid may be required to divest subsidiaries or branches, portfolios of customers or business units," the document, obtained by Reuters, said.

Lenders would have up to five years to downsize.

"Restructuring requires a withdrawal from activities which would remain structurally loss-making in the medium term," the document said.

Last month, Kroes said British lenders Royal Bank of Scotland and Lloyds, which have received state aid, may have to divest a large chunk of their assets to comply with EU antitrust rules.

The Commission had earlier agreed to restructuring plans by Germany's Commerzbank and WestLB that included roughly halving their balance sheets.

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The Commission has to date endorsed 70 banking bailouts across the region, with a number of lenders due shortly to present restructuring plans for approval.

The document said the EU executive may limit a bank's expansion in some business or geographical areas, with regulatory approval required for acquisitions.

"In exceptional circumstances ... acquisitions may be authorized by the Commission where they are part of a consolidation process necessary to restore financial stability or to ensure effective competition," the document said.

The proposed rules also frown on the payment of dividends and coupons on outstanding subordinated debt and share buybacks by lenders undergoing restructuring, saying these were in principle not compatible with the objective of burden-sharing.

But the Commission may regard favorably the payment of coupons on newly issued hybrid capital instruments with greater seniority over existing subordinated debt in the interests of promoting refinancing by the beneficiary bank, the document said.

It said banks would have to stress-test their business, disclose impaired assets, present alternatives including a break-up or absorption by another lender and have up to five years to restructure compared with the usual two to three years.

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