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Should competition policy in banking be amended during crises? Lessons from the EU

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Abstract

This article investigates the nexus of competition and stability in European banking. It analyzes the European legal framework for competition policy in banking and several cases that pertain to anti-cartel policy, merger policy, and state-aid control. It discusses whether and how competition policy should be amended in order to preserve the stability of the banking system during crises. The article argues for increased cooperation between prudential regulators and competition authorities, as well as an enhanced framework for bank regulation, supervision, and resolution that could mitigate the need to change competition policy in crisis times.

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Notes

  1. The saying is often attributed to John D. Rockefeller, although evidence is inconclusive. http://www.barrypopik.com/index.php/new_york_city/entry/competition_is_a_sin_rockefeller/.

  2. In an opposing view, Petersen and Rajan (1995) show that competition might hamper the intrinsic role of banks as monitors of borrowers. In particular, banks may invest less in relationship-building if a more competitive environment reduces the financial significance of those relationships.

  3. This effect is stronger if local non-hierarchical banks are in the financial system (Presbitero and Zazzaro 2011). In this case, higher competition forces banks to enhance their lending technology, which resides in relationship lending. However, higher competition between large and hierarchical banks forces banks to improve their main lending technology (i.e., transaction lending), which may derail relationship lending. For the interaction between competition, IT, and relationship lending, see Marinč (2013).

  4. Dell’Ariccia and Marquez (2006) argue that deregulation and consequent higher competition encourage banks to loosen credit standards in order to fight for additional market share. This might result in a lending boom and (potentially) a banking crisis. Rice and Strahan (2010) empirically mitigate that concern. They find that relaxed intrastate branching in the U.S. increased competition; however, total lending to SMEs remained unchanged.

  5. Wagner (2010) shows that Boyd and De Nicolo’s (2005) effect overlooks the fact that banks can adjust their loan portfolios toward riskier borrowers.

  6. Size heterogeneity among banks may induce large banks into collusive behavior. Bos and Harrington (2010) show that if firms are heterogeneous in their capacities, large firms may form stable cartels.

  7. The SEPA case highlights the fine line between cooperation and collusion among banks when introducing common standards into payment and processing business. The European Commission opened an investigation into e-payment standardization processes that allegedly restrict competition (see IP/11/1076, 26.9.2011). It also proposed a regulation to foster the transition to the SEPA-compliant credit transfer and direct debit transactions (see OJ 94, 30.3.2012, p.22–37).

  8. Council Regulation 1/2003/EC of December 16, 2002, on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ L 1/1, 4.1.2003) amended by Council Regulation (EC) No 411/2004 of February 26, 2004, (OJ L 68/1, 6.3.2004) and Council Regulation (EC) No 1419/2006 of September 25, 2006 (OJ L 269/1 28.9.2006)—Consolidated version of October 18, 2006.

  9. The European Commission also rejected the application of exemption through Article 81(3) TEC because of the missing empirically proven link among the MIF, system output, and related efficiencies (see OJ 2009/C 264/04). MasterCard applied under Article 230 TEC for the annulment of the European Commission's Decision (see OJ 2008/C 116/47), but the court dismissed it (Judgment of the General court in Case T-111/08, 24.5.2012).

  10. Council Regulation (EC) No 139/2004 of January 20, 2004 on the control of concentrations between undertakings (OJ L 24, 29.1.2004, p.1).

  11. Commission Regulation (EC) No 802/2004 of 7 April 2004 implementing Council Regulation (EC) No 139/2004 (published in OJ L 133, 30.04.2004, p.1) amended by Commission Regulation (EC) No 1033/2008 of 20 October 2008 (published in OJ L 279, 22.10.2008, p. 3)—Consolidated version of 23 October 2008.

  12. The community dimension of the concentration is established if certain thresholds in terms of worldwide and community-wide annual turnover of the undertakings concerned are surpassed (see Article 1 of the ECMR). Special rules are applicable for financial institutions (see Article 5(3) of the ECMR).

  13. Cordella and Yeyati (2003) support conditioning bailout policies on economic downturns. Such conditioning decreases bank risk-taking by increasing the franchise value of banks.

  14. In the long term, restricting banking competition during crises hurts consumers as well as the real economy. Peek and Rosengren (2005) and Caballero et al. (2008) show that forbearance of weak Japanese banks in the 1990s restricted interbank and interfirm competition and postponed economic recovery.

  15. See U.S. CFTC’s press release: PR6289-12 on 27 June, 2012; see also Non-prosecution agreement, 26 June, 2012, between the United States Department of Justice, Criminal Division, Fraud Section, and Barclays Bank PLC available at http://www.justice.gov/opa/pr/2012/June/12-crm-815.html; see also FSA, Final notice to Barclays Bank Plc, 27 June, 2012, http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf.

  16. FSA, Final notice to UBS AG, 19 December 2012, http://www.fsa.gov.uk/static/pubs/final/ubs.pdf; See also Case USA v. UBS Securities Japan Co, LTD, No. 12-00268, D. Conn.

  17. See the reduction of the fine due to the inability to pay under the Case COMP/39.600—Refrigeration compressors, OJ C 122, 27.4.2012, p. 6–7.

  18. See press release 17739/12 of the Council on 13.12.2012, “Council agrees position on bank supervision.”

  19. Carletti and Ongena (2009) further support the separation. They provide evidence that competition policy is valuable for banks as it acts as a controlling mechanism for prudential regulation.

  20. Sometimes forced divestment may preclude a merger from occurring. In a large cross-country merger, the parties could divest despite a low purchase price, but such divestment would not guarantee competition. Small divestments may not be attractive to foreign banks, and this may increase regional/national fragmentation.

  21. For example, before its collapse the Icelandic bank Landsbanki raised €1.7b in approximately 130,000 accounts after 5 months of doing business in the Netherlands (de Moor and du Perron 2009, pp. 54, 56).

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Acknowledgments

Special thanks to Arnoud Boot, Iwan Bos, Igor Lončarski, Maarten Pieter Schinkel, Razvan Vlahu, and an anonymous referee for their invaluable comments. Usual caveats apply.

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Authors and Affiliations

  1. Fordham University, 1790 Broadway, 11th floor, New York, NY, 10019, USA

    Iftekhar Hasan

  2. Bank of Finland, Helsinki , Finland

    Iftekhar Hasan

  3. Faculty of Economics, University of Ljubljana, Kardeljeva ploščad 17, 1000, Ljubljana, Slovenia

    Matej Marinč

  4. Amsterdam Center for Law & Economics (ACLE), Faculty of Economics and Business, University of Amsterdam, Roetersstraat 11, 1018WB, Amsterdam, The Netherlands

    Matej Marinč

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Hasan, I., Marinč, M. Should competition policy in banking be amended during crises? Lessons from the EU. Eur J Law Econ 42, 295–324 (2016). https://doi.org/10.1007/s10657-013-9391-2

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