Journal of Banking Regulation

, Volume 15, Issue 3–4, pp 299–312 | Cite as

Antitrust, competition policy and ‘too big to … ’

Original Article
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Abstract

This article asks: What is the relation between the size of financial institutions and (a) the economic downturn and (b) antitrust and competition policy? The article compares the roles of competition policy in the European Union and the United States during the financial crisis, showing that it played a significant role in the former but not in the latter. Finally, the article urges that competition advocacy be provided an enlarged role in the United States on all matters that are likely to substantially affect the structure of the financial services industry, including the economic implications of the undue concentration of economic power, broadly understood.

Keywords

antitrust competition policy too big to fail 
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Notes

Acknowledgements

Thanks to Sandeep Vaheesan for his editorial help.

Notes and References

  1. Closing speech to International Competition Network Conference by Eduardo Perez Motta, 26 April 2013, Warsaw, Poland, http://internationalcompetitionnetwork.org/uploads/library/doc898.pdf.
  3. Nassim Nicholas Taleb provides an example of the effect of fragility from size by comparing losses in a fire sale when banks of different size get into trouble. Kerveil was a rogue backroom trader whose activities nearly brought down the Parisian bank Societe General in 2008. ‘A fire sale of $70 billion worth of stocks leads to a loss of $6 billion. But a fire sale a tenth of the size, $7 billion would result in no loss at all, as markets would absorb the quantities without panic, maybe without even noticing. So this tells us that if, instead of having one very large bank, with Monsieur Kerviel as a rogue trader, we had ten smaller banks, each with a proportional Monseur Micro-Kerveil, and each conducted his rogue trading independently and at random times, the total losses for the ten banks would be close to nothing’. Nassim Nicholas Taleb (2012) Antifragile: Things that Gain from Disorder, Business & Economics, Random House, 280, 519 pages.Google Scholar
  4. See Peter Eavis (2013) A new fed thought for ‘too big to fail’ banks: Shrink them. N.Y. Times 4 May: B5. According to the Times, ‘the bill would subject the biggest banks to much higher capital requirements than smaller banks. If the bill passed, many banks would probably choose to divest themselves of assets to shrink to a size where they would not be required to hold higher amounts of capital’.Google Scholar
  5. Governor Tarullo’s approach would focus on setting a higher ‘leverage ratio’ for banks. He has said that ‘the traditional complementarity of the capital ratios might be maintained by using [Dodd–Frank] Section 165 to set a higher leverage ratio for the largest firms.’ Daniel K. Tarullo, Evaluating progress in regulatory reforms to promote financial stability (3 May 2013), http://www.federalreserve.gov/newsevents/speech/tarullo20130503a.pdf.
  6. Douglas, D. (2013) Attorney General says big banks’ size inhibits prosecution. Washington Post 7 March, http://articles.washingtonpost.com/2013-03-06/business/37500594_1_criminal-charges-hsbc-case-swiss-bank; Forsyth, R.W. (2013) Too big to jail, Barron’s, 9 March 2013, http://online.barrons.com/article/SB50001424052748704836204578340381145471280.html#articleTabs_article%3D1; Sanders S.B. (2013) Too big to jail? Huffington Post 28 March http://www.huffingtonpost.com/rep-bernie-sanders/too-big-to-jail_b_2973641.html.
  8. A U.S. pension fund recently filed a class action against 12 leading banks that dominate the credit default swap market, alleging that they conspired to suppress competition in the market. See Karen Brettell, U.S. pension fund files suit against bank CDS ‘conspiracy’, Reuters, 6 May 2013, http://www.reuters.com/article/2013/05/06/banks-credit-classaction-idUSL2N0DN1IA20130506.
  9. ‘Sheer enterprise size and monopoly are not necessarily synonymous. Nevertheless, there are hypotheses that link variations in economic performance to interactions between overall corporate size and power within particular markets. One may also be apprehensive on social and political grounds about the share of economic activity controlled by large corporations. It is worth the labor therefore to examine the position of the largest industrial enterprises’. Scherer F.M. and Ross, D. (1990) Industrial Market Structure and Economic Performance, 3rd edn., 57.Google Scholar
  10. A statement reflecting continuing concern about economic power was published 4 years before the current financial crisis. See Walter Adams and James W. Brock, The Bigness Complex 8 (2004): ‘The power of concern here … includes the capacity to obstruct technological advance; to manipulate the alternatives from which society is allowed to choose; to coerce society to accede to its demands through threats to shut down facilities or to relocate them elsewhere; to infiltrate government agencies with influential decisionmakers drawn from the industries ostensibly being regulated; and to obtain government bailouts when collapsing giants are considered to be too big and too important to be allowed to fail. It is, in other words, the discretion to determine how society’s resources shall be used, the rules by which the economic game shall be played, and the kind of society in which we shall live’.Google Scholar
  11. Powell, J.H. (2013) Ending ‘too big to fail’. 4 March, http://www.federalreserve.gov/newsevents/speech/powell20130304a.htm.
  12. Stanton, T.H. (2012) Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis (Oxford University Press, 2012).Google Scholar
  13. Taleb attributes one problem of size to the interacting parts within a complex system. For example, ‘For complex systems are, well, all about information. And there are many more conveyors of information around us than meet the eye. This is what we will call causal opacity: it is hard to see the arrow from cause to consequence, making much of conventional methods of analysis, in addition to standard logic, inapplicable’. Taleb (2012) supra note 3, at pp.56–57.Google Scholar
  14. The Senate Permanent Subcommittee on Investigations released a major investigative report on JPMorgan’s ‘London Whale’ trading debacle. It provides a devastating portrayal of systemic failures of risk management and oversight by JPMorgan’s management and the bank’s primary regulatory, the OCC. See U.S. Senate Permanent Subcommittee on Investigations, JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses, Majority and Minority Staff Report (14 March 2013), http://www.hsgac.senate.gov/download/report-jpmorgan-chase-whale-trades-a-case-history-of-derivatives-risks-and-abuses-march-15-2013.
  15. Andrew Haldane of the Bank of England has concluded that there are no economies of scale or scope for banks with assets greater than $100 billion if the implicit subsidies associated with being too big to fail are removed. See Andrew G. Haldane (2012) On being the right size (25 October), http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech615.pdf.
  16. The leading Supreme Court case is still United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963), but the case no longer represents either current USDOJ practice or current court decisions, which generally follow Agency Merger Guidelines. In general, current practice focuses on competitive effects in particular product and geographic markets. The idea that a cluster of products and services denoted by the term ‘commercial banking’ constitutes a distinct antitrust product market is to a great extent a vestige of the past.Google Scholar
  17. The Supreme Court decided two conglomerate merger cases. See FTC v. Procter & Gamble Co., 386 U.S. 568 (1967); FTC v. Consolidated Foods Corp., 380 U.S. 592 (1965).Google Scholar
  18. Johnson, S. and Kwak, J. (2010) Thirteen Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010).Google Scholar
  19. The largest banks are alleged to have engaged in a cartel to manipulate LIBOR rates, but if they are found guilty, there are many remedies (such as treble damages) that are much more likely to be imposed than any sort of divestiture that would cause the banks to be smaller. Size of the member firms is apparently not a significant factor in a cartel of this sort. The antitrust claims against the banks were recently dismissed by the district court. See In re LIBOR-based Fin. Instruments Antitrust Litig., 2013 U.S. Dist. LEXIS 45909 (S.D.N.Y. 2013).Google Scholar
  20. U.S. Dep’t of Justice Antitrust Division Manual, Competition Advocacy, http://www.justice.gov/atr/public/divisionmanual/chapter5.pdf.
  21. For historical background on the crisis in banking as it affected Europe, we rely largely on a 2009 report of the EU. See European Commission, Economic Crisis in Europe: Causes, Consequences and Responses (2009), http://ec.europa.eu/economy_finance/publications/publication15887_en.pdf.
  22. Neelie Kroes, Eur. Comm’r for Competition Pol’y, Competition policy and the Crisis – The Commission’s Approach to Banking and Beyond, Competition Policy Newsletter 2010, http://ec.europa.eu/competition/publications/cpn/2010_1_1.pdf.
  24. See Kokkoris, I. and Olivares, R. (2010) Antitrust Law Amidst Financial Crisis (Cambridge University Press, 2010).Google Scholar
  25. AAI Working Paper 11-01, Jonathan DeVito, The Role of Competition Policy and Competition Enforcers in the EU Response to the Financial Crisis: Applying the State Aid Rules of the TFEU to Bank Bailouts in Order to Limit Distortions of Competition in the Financial Sector, http://www.antitrustinstitute.org/~antitrust/content/aai-working-paper-no-11-01-role-competition-policy-and-competition-enforcers-eu-response-fin.
  26. Adler, E., Kavanagh, J. and Ugryumov, A. (2010) State aid to banks in the financial crisis: The past and the future, Journal of European Competition Law & Practice 66, 69 (2010).Google Scholar
  27. Johnson, S. (2013) Betrayed by Basel. N.Y. Times 10 January.Google Scholar
  28. Koopman, G-J. (2011) Stability and competition in EU banking during the financial crisis: The Role of State Aid and Control. Competition Policy International 7(8), http://ec.europa.eu/competition/speeches/text/koopman_cpi_7_2_en.pdf.
  29. See AAI Working Paper No. 13-01: Kexin Li, The Dormant Commerce Clause, Anticompetitive State Regulation, Competition, and Consumers, http://www.antitrustinstitute.org/~antitrust/content/aai-working-paper-no-13-01-dormant-commerce-clause-anticompetitive-state-regulation-competit.
  30. See AAI Working Paper 12-07, Kevin Kim, Competition Policy in the Financial Crisis, http://www.antitrustinstitute.org/~antitrust/content/aai-working-paper-no-12-07-competition-policy-financial-crisis.
  31. Big-bank pioneer now seeks breakup. Wall Street Journal 26 July 2012, http://online.wsj.com/article/SB10000872396390444840104577549441815973130.html.
  32. Johnson, S. (2013) Big banks are hazardous to U.S. financial health, Bloomberg, 2 September, http://www.bloomberg.com/news/2012-09-02/big-banks-are-hazardous-to-u-s-financial-health.html.
  33. Kim points out that the press releases announcing the Federal Reserve’s approval of the crisis mergers each included the same statement on the Department of Justice’s analysis and approval of the merger. See Kim, Competition Policy in the Financial Crisis, supra 39, at p. 12.Google Scholar
  34. See Symposium, Felsenfeld, C., Brode, D., Foer, B. and Gron, A. (2008) The antitrust aspects of bank mergers. Fordham Journal of Corporate & Financial Law 13: 507–547.Google Scholar
  35. Section 165 is titled ‘Enhanced Supervision and Prudential Standard for Nonbank Financial Companies Supervised by the Board of Governors and Certain Bank Holding Companies’.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2014

Authors and Affiliations

  1. 1.American Antitrust InstituteWashington DCUSA

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