Skip to main content
SpringerLink
Log in

Competition Policy in Banking in the European Union

  • Published:
Review of Industrial Organization Aims and scope Submit manuscript

Abstract

We examine the evolution of competition in banking in the EU in its interaction with regulatory developments and the parallel evolution of the application of competition policy in the sector. The crisis of 2007–2009 interrupted the normalization of competition policy in banking that started in the early 1980s; the crisis also reversed some advances in competitive pressure that had occurred due to market integration and the introduction of the euro. Competition policy has to cope post-crisis with a sector that is systemic and subject to regulatory failure. There is ample room to improve both competition and stability in banking by refining regulation.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: ECB

Fig. 2

Source: ECB

Fig. 3

Source: ECB

Fig. 4

Source: World Bank

Similar content being viewed by others

Notes

  1. See Vives (1991) for an early analysis.

  2. See European Commission (2005).

  3. See Figure 2.5 in Vives (2016).

  4. Branches in the euro area have been reduced by 17% since 1997, which represents the closure of almost 32,000 branches. Employment has fallen less since 2008: a 12% reduction as of 2017.

  5. Gual (1999) studies the effect of deregulation in the market structure of European banking in the period 1981–1995 and finds that concentration increases notably with deregulation.

  6. From 1998 to 2017 the number of credit institutions in the EU has fallen by 32%. The restructuring took place in the years of crisis from 2008, with a drop since then of 26%, with the greatest decreases of 70% in the Netherlands, 43% in Spain and 42% in Greece.

  7. See Baer and Mote (1985).

  8. Average HHIs of MSA (urban markets) decreased 9.5% from 1980 to 2017 and the average HHIs of non-MSA counties (rural markets) also decreased 11.5% in the period. The fall took place until the end of the 2000 s, remaining stable in later years. We are grateful to Robert Adams at the Fed for providing the data.

  9. According to ECB (2017a), cross-state M&A transactions in the USA represented between 31 and 52% of the total number of transactions between 2000 and 2016. The equivalent share in the EMU was between 5 and 19%.

  10. See Danthine et al. (1999) and Barros et al. (2005). Campa and Hernando (2006) find that the cumulative abnormal returns of M&As that were announced in the EU in 1998–2000 are lower in regulated industries such as banking and that those abnormal returns are in fact negative for cross-border M&As: a sign of the obstacles they face.

  11. See ECB (2017b).

  12. See Barros et al. (2005) and Van Rixtel et al. (2007).

  13. See ECB (2017a).

  14. The small market share that foreign banks have in several European countries is partially explained by the type of M&A that has taken place, where domestics have predominated.

  15. Claessens and Laeven (2004)—in a sample of 50 countries in the period 1994–2001—show that most banking markets are monopolistically competitive with H between 0.6 and 0.8. The authors also highlight that typically entry barriers and not concentration is what determines competition: greater foreign entry and fewer restrictions on entry or activity yield more competitive outcomes. In this line, several papers have shown that concentration need not be a good proxy for competition (Casu and Girardone, 2009; Carbó et al. 2009; Liu et al. 2013; etc.). At the same time it is worth noting that competition measures in the sector should consider also the two-sided market nature of the banking business (see, e.g., Section 4.1.4 in Vives (2016)).

  16. The negative value of Germany's Lerner index is associated to the fact that its return on equity (ROE) is negative and of high absolute value in 2008 (− 12.2%) and 2009 (− 4.7%) and very low in all the considered period.

  17. See Vives (2016, ch. 5) for an extended discussion of the issue.

  18. For example, in the Netherlands, the Competition Act of 1998 has applied to the banking sector since 2000; also in Italy since December 2005 competition policy has been enforced in the banking sector by the general competition authority rather than by the Bank of Italy (see Carletti et al. 2015).

  19. See Baso et al. (2018).

  20. In the Netherlands, the Minister for Economic Affairs can overturn a merger decision of the competition authority if this conflicts with the decision of the supervisory authority. The situation is similar in Germany, where the Economics Minister may overturn a blocking decision by the Cartel Office for reasons of general welfare (upon consultation with the Monopoly Commission). In the UK, the government may approve a merger against the advice of the competition authority on financial stability grounds. In Italy, until the 2005 reform the competition authority was requested to issue only an opinion on the proposed M&A with the supervisor in charge for merger review. In France, bank merger reviews have been integrated in common competition law since 2003 and in 2008 exclusively under the Competition Authority -- which is required to consult the relevant regulator. In Portugal, the banking system has been subject to merger control since 2003, although with a delay of 5 years relative to the other sectors. See Carletti and Hartmann (2003) and Carletti et al. (2015).

  21. See Vives (2005).

  22. The EC can request all relevant information from the national supervisory authorities in mergers in the banking sector of Community dimension; but according to the European Merger Regulation (Article 21(3)) Member States may block a merger to protect financial stability (considered a “legitimate interest”) in the domestic market. This was the case, for example, in Portugal (case Banco Santander/Champalimaud group in 1999), and Italy (cases BNL/BBVA in 2005; ABN AMRO/Antonveneta in 2005; Unicredito/HVB in 2006); this contrasts with the attitude of the UK in the merger of Santander/Abbey or the attitude of the Netherlands with the three- way acquisition and split of ABN AMRO. See Carletti and Vives (2009).

  23. See Kapsis (2012) for a survey on this issue.

  24. Three basic conditions are required: The bank must be failing or be likely to fail (the decision upon this matter is taken by the ECB); no alternative private solutions can exist; and it must be necessary to the public interest (the SRB has power to decide when these two last conditions are met).

  25. Reductions of market power are measured by the Lerner Index and net interest margins in a dataset of 124 countries; 41 of them experienced banking crises between 1996 and 2010.

  26. Berger and Roman (2015) show that TARP in the United States enhanced both the market shares and market power (according to the Lerner index) of protected banks because they were perceived to be safer.

  27. See Perotti and Suarez (2002).

  28. See Vives (1992) for an early proposal of the elements of a banking union for Europe.

  29. See Chiappori et al. (1991), Danthine et al. (1999), and Dell'Ariccia and Marquez (2006).

  30. The example of the forced closure of BCCI (Bank of Credit and Commerce International) in 1991 illustrates this point, since it was authorized in Luxembourg but many of its customers were abroad: The bank was present in 78 countries.

  31. See European Commission (2018).

References

  • Baer, H. L., & Mote, L. R. (1985). The effects of nationwide banking in concentration: Evidence from abroad. Economic Perspectives, 9, 3–17.

    Google Scholar 

  • Barros, P., Berglöf, E., Fulghieri, P., Gual, J., Mayer, C., & Vives, X. (2005). Integration of European banking: The way forward. In Monitoring European Deregulation 3. London: CEPR.

  • Baso, A., Bon, J., Tasker, B., Timan, N., Walker, M., & Whitcombe, Ch. (2018). Recent developments at the CMA: 2017–2018. Review of Industrial Organization, 53, 615–635.

    Article  Google Scholar 

  • Berger, A., & Roman, A. (2015). Did TARP banks get competitive advantages? Journal of Financial and Quantitative Analysis, 50(06), 1199–1236.

    Article  Google Scholar 

  • Bikker, J. A., & Spierdijk, L. (2017). Handbook of competition in banking and finance. Cheltenham: Edward Elgar‎.

    Book  Google Scholar 

  • Calderon, C., & Schaeck, K. (2016). The effects of government interventions in the financial sector on banking competition and the evolution of zombie banks. Journal of Financial and Quantitative Analysis, 51(04), 1391–1436.

    Article  Google Scholar 

  • Campa, J. M., & Hernando, I. (2006). M&As performance in the European financial industry. Journal of Banking & Finance, 30(12), 3367–3392.

    Article  Google Scholar 

  • Carbó, S., Humphrey, D., Maudos, J., & Molyneux, P. (2009). Cross-country comparisons of competition and pricing power in European banking. Journal of International Money and Finance, 28, 115–134.

    Article  Google Scholar 

  • Carbó, S., & Rodríguez, F. (2007). The determinants of bank margins in European banking. Journal of Banking & Finance, 31(7), 2043–2063.

    Article  Google Scholar 

  • Carletti, E., & Hartmann, P. (2003). Competition and stability: What’s special about banking? In P. Mizen (Ed.), Monetary history, exchange rates and financial markets: Essays in honour of Charles Goodhart (pp. 202–229). Cheltenham: Edward Elgar.

    Google Scholar 

  • Carletti, E., Hartmann, P., & Ongena, S. (2015). The economic impact of merger control legislation. International Review of Law and Economics, 42(6), 88–104.

    Article  Google Scholar 

  • Carletti, E., & Vives, X. (2009). Regulation and competition policy in banking. In X. Vives (Ed.), Competition policy in the EU: Fifty years on from the treaty of Rome (pp. 479–497). Oxford: Oxford University Press.

    Google Scholar 

  • Casu, B., & Girardone, C. (2009). Competition issues in European banking. Journal of Financial Regulation and Compliance, 17(2), 119–133.

    Article  Google Scholar 

  • Chiappori, P., Mayer, C., Neven, D., & Vives, X. (1991). The microeconomics of monetary union. London: CEPR.

    Google Scholar 

  • Claessens, S., & Laeven, L. (2004). What drives bank competition? Some international evidence. Journal of Money, Credit and Banking, 36, 563–583.

    Article  Google Scholar 

  • Cruz-García, P., Fernández de Guevara, J., & Maudos, J. (2017). The evolution of market power in European banking. Finance Research Letters, 23, 257–262.

    Article  Google Scholar 

  • Danthine, J. P., Giavazzi, F., von Thadden, E. L., & Vives, X. (1999). Monitoring European integration: The future of European banking. London: CEPR.

    Google Scholar 

  • De Jonghe, O., Diepstraten, M., & Schepens, G. (2016). Competition in EU banking. In T. Beck & B. Casu (Eds.), The Palgrave handbook of European banking. London: Palgrave Macmillan.

    Google Scholar 

  • Dell’Ariccia, G., & Marquez, R. (2006). Competition among regulators and credit market integration. Journal of Financial Economics, 79, 401–430.

    Article  Google Scholar 

  • European Central Bank. (2017a). Financial integration in Europe. May 2017. Frankfurt am Main.

  • European Central Bank. (2017b). Annual report 2017. Frankfurt am Main.

  • European Commission. (2005). White paper on financial services policy 2005–2010 (SEC (2005) 1574). Commission Staff Working Paper Document, Brussels.

  • European Commission. (2018). State Aid Scoreboard 2018. Overview Tables.

  • Fernández de Guevara, J., & Maudos, J. (2017). Competition in the European banking markets in the aftermath of the financial crisis. In J. A. Bikker & L. Spierdijk (Eds.), Research handbook on competition in banking and finance (pp. 118–138). Cheltenham: Edward Elgar.

    Chapter  Google Scholar 

  • Gropp, R., Hakenes, H., & Schnabel, I. (2011). Competition, risk-shifting, and public bail-out policies. Review of Financial Studies, 24, 2084–2120.

    Article  Google Scholar 

  • Gual, J. (1999). Deregulation, integration and market structure in European banking. Journal of Japanese and International Economics, 12(4), 372–396.

    Article  Google Scholar 

  • Kapsis, I. (2012). Competition law and policy for the EU banking sector in a period of increased economic uncertainty. International Journal of Law and Management, 54(4), 284–301.

    Article  Google Scholar 

  • Liu, H., Molyneux, P., & Wilson, J.O. (2013). Competition in banking: measurement and interpretation. In A. Bell, Ch. Brooks, & M. Prokopczuk (Ed.), Handbook of research methods and applications in Empirical Finance, (pp.197–215). Edward Elgar Publishing.

  • Maudos, J., & Fernández de Guevara, J. (2007). The cost of market power in the European banking sectors: Social welfare loss vs. inefficiency cost. Journal of Banking & Finance, 31, 2103–2125.

    Article  Google Scholar 

  • Perotti, E., & Suarez, J. (2002). Last bank standing: What do I gain if you fail? European Economic Review, 46(9), 1599–1622.

    Article  Google Scholar 

  • Van Rixtel, A., Kok, C., van Leuvensteijn, M. & Bikker, J.A. (2007). A new approach to measuring competition in the loan markets of the euro area. Working Paper Series 768, European Central Bank.  

  • Vives, X. (1991). Banking competition and European integration. In A. Giovannini & C. Mayer (Eds.), European financial integration (pp. 9–31). Cambridge: Cambridge University Press.

    Chapter  Google Scholar 

  • Vives, X. (1992). The supervisory function of the European system of central banks. Giornale degli Economisti e Annali di Economia, 51(9–12), 523–532.

    Google Scholar 

  • Vives, X. (2005). Europe banks future on the urge to merge. Wall Street Journal Europe May 13.

  • Vives, X. (2016). Competition and stability in banking, the role of regulation and competition policy. Princeton: Princeton University Press.

    Book  Google Scholar 

Download references

Acknowledgements

The authors are grateful for the comments of two anonymous referees, Lawrence J. White (General Editor of the Review of Industrial Organization) and Kern Alexander (the discussant of this paper presented at the Conference “Celebrating 25 years of the European Union Single Market”). We are grateful to Hugo Ferradans and Giorgia Trupia for excellent research assistance. The authors acknowledge financial support from the Spanish Ministry of Economy, Industry and Competitiveness (Project ECO2017-84858-R-AEI/FEDER, UE for Maudos and ECO2015-63711-P for Vives).

Author information

Authors and Affiliations

  1. Departamento de Análisis Económico, Edificio departamental Oriental, University of Valencia, Avda. de los Naranjos, s/n., 46022, Valencia, Spain

    Joaquín Maudos

  2. Ivie, C/Guardia Civil 22, Esc. 2, 1º, 46020, Valencia, Spain

    Joaquín Maudos

  3. IESE Business School, Av. Pearson, 21, 08034, Barcelona, Spain

    Xavier Vives

Authors
  1. Joaquín Maudos
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Xavier Vives
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Xavier Vives.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Maudos, J., Vives, X. Competition Policy in Banking in the European Union. Rev Ind Organ 55, 27–46 (2019). https://doi.org/10.1007/s11151-019-09687-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11151-019-09687-5

Keywords

JEL Classification

Search

Navigation