Financial crisis , Regulation and
Antitrust
Frederic Jenny
Chair OECD Committee
Professor of Economics ESSEC
CIRC Conference on Revisiting the Global Experience with Economic Regulation,
New Delhi, April 19th and 20th 2011
1
Issues
Measures adopted by governments in a period of crisis
1) Measures aimed at restoring confidence in financial markets and
ensuring the stability of financial markets.
2) Extending the reach of regulation in the financial sector
3) Measures aimed at preventing the extension or the deepening of the
economic crisis in the real sector.
4) Protectionist measures
The role of competition authorities in a time of crisis
1) Interventions of competition authorities in the regulatory process
2) Possible enforcement adjustments in a time of crisis
3) Possible agenda for the post-recovery period
Conclusion
2
Short run and long run consequences of
the financial and real crisis for antitrust:
Two different questions:
1) How is antitrust going to be affected during the crisis (a period
of retrenchement)
2) What is the antitrust world going to look like after the crisis
(a return to business as ususal ? The emergence of a new
paradigm ?)
3
Measures adopted by governments
in a period of crisis
1) Measures aimed at restoring confidence in financial markets and
ensuring the stability of financial markets.
-Injections of liquidity into financial markets by central banks;
-Issuances of short and medium-term debt to assist banks, credit
institutions, pension funds or insurance companies to overcome a
temporary liquidity shortage;
-Government guarantee of financial institutions’ liabilities;
-Regulatory capital forbearance,
-Recapitalization of banks and insurance companies.
-Carving-out of insolvent banks’ bad loan portfolios (usually
accompanied by organizational restructuring of the banks);
-Restructuring of the banking and financial sector in order to
increase the stability of these sectors.
4
Preventing an outright collapse of
the financial system
After September 2008 EU Member State governments, together with the
Commission, spelled out the principles and objectives for a coordinated
approach to tackle the crisis. Rescue packages for national banking sectors
were rapidly set up, in line with the guidance swiftly provided by the Commission
on the design and implementation of State aid in favour of banks.
Between October 2008 and July 2009 , the Commission has approved a total of
over 3½ trillion (almost one-third of the GDP) of State aid measures to financial
institutions. So far, EUR 1½ trillion (13% of GDP) have been effectively used
under the four main headings of debt guarantees, recapitalisation, liquidity
support, and treatment of impaired assets.
The main rationale is to ensure that rescue measures can fully attain the
objectives of financial stability and maintenance of credit flows, while minimising
competition distortions and negative spillovers of public interventions between
beneficiaries of aid in different Member States, between beneficiaries with
different risk profiles and between aid beneficiaries and banks that do not benefit
from aid.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 5
State guarantees on bank liabilities
They represent the largest budgetary commitment among the aid instruments, with
EUR 2.9 trillion (25% of EU GDP) of approved measures, out of which EUR 1 trillion
(8% of GDP) have been effectively granted.
Set up as an immediate response to the drying up of liquidity in the interbank market
in the early days of the crisis, their aim was to provide a timely solution to the lack of
confidence and remedy the liquidity squeeze and its wider consequences.
Member States have typically chosen to provide such guarantees in national
schemes, with a time limited window during which banks could make use of them.
The main potential source of negative spillovers of such measures, which could also
jeopardise their effectiveness, was the danger of large flows of funds between
Member States in search for the highest level of protection.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 6
State guarantees on bank liabilities
In order to avoid such arbitrage, the Banking Communication of 13 October 2008,
together with the ECB recommendations on pricing of government guarantees,
provided conditions with which any national guarantee on banks liabilities would
have to comply.
- They need to be open to all banks, including subsidiaries of foreign banks
established in a Member State without any discrimination;
-they can cover liabilities longer than 3 months lasting up to three years
(subsequently prolonged.
Some Member States also chose to provide other liquidity and bank funding
support, totalling over EUR 300 billion (3% of EU GDP) of approved measures, of
which the bulk has been used.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 7
Example: the Irish bank guarantee
scheme
On 2 October 2008, following a crash in the value of bank stocks on the
Irish stock exchange, the Irish Government decides to grant an unlimited
guarantee on all bank deposits at its six main banks for the next two years,
to maintain financial stability.
The Irish guarantee scheme does not underwrite the non-Irish banks
which were competing with the Irish Banks, thus creating a potential
domestic competition problem. It triggered a cross-border flow of cash
from British businesses to Irish banks making the British banks more
fragile
The British Government denounced the discriminatory and anticompetitive nature of the Irish scheme.
The European Commission forced the Irish Governement to amend its
scheme and to provide coverage of banks with systemic relevance to the
8
Irish economy (not just “Irish” banks).
Recapitalisation of banks in the EU
. The Commission published the Recapitalisation Communication of 5
December 2008 (European Commission 2008c) guiding the design of
recapitalisation of banks by Member States.
The main principles that limit the competition distortion of these structural and
lasting interventions are
-(i) the price that the beneficiary has to pay for State capital, which depends on
the risk profile of the bank and the seniority of the instrument used, and
-(ii) the follow up required from the bank, which can go from an exit strategy from
reliance on State capital for fundamentally sound banks to in-depth restructuring
or liquidation for distressed banks.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 9
Example: the recapitalization of
Northern Rock
In August 2007, the British Government announces
various public support
mechanisms to support Northern Rock Plc bank and the bank is taken into temporary
public ownership (TPO) in February 2008.
The Office of Fair Trading points out that in the personal current account, savings
and investment product markets, consumers concerned about the stability of banks
might choose Northern Rock because it was the only bank with a 100 per cent
deposit guarantee. The OFT also worries that Northern Rock might be able to take
advantage of a lower cost of capital in money markets to offer lower rates on its
mortgages. “This could lead to an adverse impact on competition that may in turn
lead to consumer harm”.
The Northern Rock Restructuring Plan issued in March 2008 includes commitments
by Northern Rock to minimise risk of competitive distortions. It will not promote its
offering on the basis of Government guarantee arrangements, nor will to sustain a
prolonged market leadership in any product category and to maintain market shares
at well below historic levels.
10
Treatment of impaired assets
On 25 February 2009,the Commission (European Commission 2009g) provided
guidance for the treatment of impaired assets. Irrespective of the design of the
asset relief measures, be it as purchase, guarantee, or a hybrid,
it requires full transparency and disclosure from beneficiary banks, adequate
burden sharing between the State and the beneficiary, and prudent valuation of
impaired assets based on their real economic value both in the base and stress
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 11
Other measures: the merger
between LLoyds TSB and HBOS
In September 2008 the UK government engineers acquisition of HBOS Plc
by Lloyds TSB.
The Office of Fair Trading reports that Lloyds TSB would then have a share
of 33% on the market for personal accounts and 28 % of the U.K. home-loan
market and that the collective share of the big four UK banks would rise
from 67 to 80%. It states that: “there is a realistic prospect that the
anticipated merger will result in a substantial lessening of competition in
relation to personal current accounts, banking services for small and
medium sized enterprises and mortgages.”
On 24 October 2008, an amendment to the UK’s merger control rules
introduced a new public interest consideration to be weighed against the
consideration of effect on competition: “maintaining the stability of the UK
financial system” and the merger is approved on 31 October 2008
12
Importance of competition in the
financial sector in a time of crisis
-Complement of stimulus packages (distribution of credit)
-Passing on of decrease in refinancing rates ( cheaper credit)
- Financial innovation ( allowing savings to be directed into the most
productive capital investments).
Those objectives are unlikely to be achieved unless there is a sufficient
degree of competition between financial institutions
13
Independent Commission on
Banking in the UK: Interim Report
(…) UK retail banking needs to be more competitive. The damage to competition
done by the crisis will not be remedied by the divestitures of RBS and Lloyds
assets required by the European Commission. But now there are opportunities to
make competition work better for customers.
First, the Lloyds divestiture could be strengthened to create a more effective
challenger to the incumbent banks.
Second, the ability of customers confidently to switch between banks could be
greatly improved. Together with better conditions for customer choice, this would
make banks compete more effectively to deliver what customers want.
Third, current reform of UK regulatory institutions must ensure that effective
competition can at last be a central force in UK financial regulation.
The Commission’s current view is that all three opportunities to promote
competition should be seized.
14
1) Sir John Vickers, April 11 2011
Possible toxic effects of direct
interventions in the financial sector
-Distorsion of incentive leading operators to deviate from profit
maximizing behaviour
-Distortion of competition (aided financial institutions can prevail over
possibly more efficient unaided competitors)
- Unnecessary lessening of competition ( particularly in the area of
mergers)
15
Conclusion
Measures aimed at restoring confidence in financial markets and
ensuring the stability of financial markets are often discriminatory
and anticompetitive and they may also impact competition in the
real sector (ex Farm Equipemnt in the US).
In some cases the NCA is not consulted ( ex Irish Bank Guarantee
Scheme, Farm Equipment in the US) ; in other cases the NCA is
consulted either successfully (ex: Northern Rock bail out) or
unsuccessfully (ex Lloyds Plc/ HBOS merger)
The EC Commission has some power to force Member States
which take discriminatory or anticompetitive measures but is
powerless to intervene in some other cases ( ex:the Lloyds Plc/
HBOS merger).
16
Measures adopted by governments
in a period of crisis
2) Extending the reach of regulation in the financial sector
- Strengthening of prudential regulation of financial institutions
- Regulation to limit the growth or the diversification of banks
- Regulation of new players on financial markets ( hedge funds , for
example)
- Regulation of new financial instruments ( CDOs, for example)
- Regulation of incentives for executives in the financial sector (bonuses,
golden parachutes, stock options)
-Regulation of Credit Rating Agencies
-Modifying accounting rules ( mark to market)
-Extending the reach of regulators ( international cooperation)
17
Independent Commission on
Banking in the UK: Interim Report
First, we estimate that systemically important banks should have an equity ratio of
at least 10% provided that they also have genuinely loss-absorbing debt. We
believe this should be agreed internationally. But whether or not it is, we believe
that it should apply to UK retail banking. Then international standards would apply
to the wholesale and investment banking activities of UK banks, so long as the
taxpayer is not on the hook if they fail.
Second, and in structural support of that approach to capital, the Commission sees
merit in a UK retail ‘ring-fence’. This would require universal banks to maintain the
UK retail capital ratio – that is, not to run down the capital supporting UK retail
activities below the required level in order to shift it, say, to global wholesale and
investment banking. Our current view is that such a limit on banks’ freedom to
deplete capital would be proportionate and in the public interest, and would
preserve benefits of universal banking while reducing risks. Without it, capital
requirements higher than 10% across the board might well be called for.
1) Sir John Vickers, April 11 2011
18
Example : regulating
the credit rating agencies (CRAs)
Ensuring that CRAs give accurate assessments of the risk quality of assets is
crucially important for investors, firms seeking financing, regulated firms such
as banks which are constrained in the kind of risky assets they can hold and
regulators who rely on CRAS assessments.
Reasons to doubt that competition is strong and that it will eliminate CRAs
giving poor quality credit rating (high concentration, necessity for regulated
firms or other firms to get credit rated leading to low price elasticity of
demand, possible conflicts of interest when CRAs also sell other services,
possible collusion between CRAs and clients).
Alternative solutions with different competitive impacts include self-regulation,
transparency requirements and best practices, regulation, modification of
regulatory agencies reliance on assesments of the Big Three, creation of
public rating agencies etc..
19
Possible toxic effects of regulations
-Ineffective regulations (loopholes, electricity regulation and
Enron, financial regulation)
-Regulations which distort incentives in unexpected ways
-Regulations which unnecessarily restrict/ distort competition
(telecom regulation after the breakup of ATT)
-Regulations which impair innovation ( see Greenspan)
Hence necessary cooperation between sectoral regulators and
competition authorities for the design of appropriate regulations 20
Conclusion II
Regulatory proposals for the financial sector can have serious implications for
competition.
There is a large number of such proposals being considered now following
the G-20 meeting of
A lot of these proposals are drafted by financial authorities or rgulators
without input from competition authorities and it is far from sure that
competition issues are even considered to be relevant by the drafters
21
Measures adopted by governments
in a period of crisis
3) Measures aimed at preventing the extension or the deepening of the
economic crisis in the real sector.
Stimulus packages including:
-Direct aid to ailing business firms or small and medium size firms which are
collateral victims of the credit crisis;
-Subsidized interest rate for certain types of firms;
-Sectoral aid designed to boost demand in specific sectors.
22
Fiscal stimulus: The European
Economic Recovery Plan (EERP)
Stimulus package
Endorsed by the European Council in December 2008.
The Plan aimed to provide a framework for a coordinated crisis control policy,
while also laying down guidance on principles governing the measures taken at
national level.
Size: The Plan originally totalled €200 billion, or 1.5 per cent of EU GDP in
2009, to boost demand while respecting the Stability and Growth Pact. It was
made up of a budgetary expansion by the Member States of €170 billion and EU
funding to support immediate actions of about €30 billion.
Total spending has been greater than initially foreseen, however, with outlays
amounting to 1.4 per cent of GDP in 2010 in addition to the 2009 stimulus.
In line with the principles set out in the Plan, many Member States have
adopted or announced significant fiscal stimulus packages to promote
investment, support households’ purchasing power, help enterprises and sustain
labour Crisis
markets.
Economic
in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 23
Supporting viable businesses: The European
Economic Recovery Plan (EERP)
Stimulus package
The EERP recognised the need for public intervention to support viable
businesses during the crisis to ease financing constraints facing and to support
specific credit services (e.g. export credit insurance) which markets were
temporarily unable to provide, at least at economically viable conditions and
prices.
Beyond the aggregate demand support provided by macroeconomic
instruments, there may also be a case for temporary government support
targeted at sectors where demand has been disproportionately affected by the
crisis and could cause important dislocations.
Temporary public support could help prevent unnecessary and wasteful labour
shedding and the destruction of otherwise viable and sound companies. These
measures will help contain the negative effects of the crisis on potential output
by preventing a permanent loss of knowledge and skills and a reduction of
productive capacity far beyond what would be expected during a normal cyclical
slowdown.
Finally, there may be instances, where government support on the supply side is
warranted
sectors
andConsequences
business where
there EUROPEAN
are technological
other
Economic
Crisis for
in Europe:
Causes,
and Responses
ECONOMYor
7|2009
24
spillovers benefits to the economy.
Supporting viable businesses: The European
Economic Recovery Plan (EERP)
Stimulus package
The March 2009 Commission Communication "Driving European Recovery" set
out a number of guiding principles for actions to be taken by Member States in
support of businesses, among which were the following:
-Maintaining openness within the internal market, continuing to remove barriers
and avoid creating new ones.
-Ensuring non-discrimination by treating goods and services from other Member
States in accordance with EU rules and Treaty principles.
-Targeting interventions towards longer-term policy goals: facilitating structural
change, enhancing competitiveness in the long term and addressing key
challenges such as building a low carbon economy.
-Sharing information and best practice.
-Pooling efforts and designing measures so that they generate synergies with
those taken by other member states. Stronger co-operation at European level is
key in this respect.
- Keeping the Single Market open to trading partners and respect international
Economic
Crisis in Europe:
Causes, those
Consequences
Responses
commitments,
in particular
made and
in the
WTO. EUROPEAN ECONOMY 7|2009 25
Assessing support for businesses measures
in The European Economic Recovery Plan
(EERP)
Stimulus package
Support for businesses sectors under the EERP has been provided both on the
demand and the supply side (state aid).
Most Member States have put in place horizontal frameworks that allow policy
support to be given to sectors that are most affected by the crisis (e.g. cars,
tourism, construction), and, as a general rule, these seem temporary, targeted
and timely.
However, there is considerable variation across Member States in terms of the
support actually provided. Also, the effectiveness of national schemes for
industries operating across the entire internal market could be somewhat
limited. Should schemes need to be maintained beyond the year end then there
would be a clear case for more coordination at the European level.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|200926
The European Economic Recovery
Plan (EERP)
Stimulus package
The national plans have generally been targeted on policy areas identified in the
Plan:
- about 39 per cent of the stimulus has been directed towards supporting
households’ purchasing power (including vulnerable groups),
-16 per cent to supporting labour markets,
- 20 per cent to investment activities, and
-25 per cent as support to businesses.
About two thirds of support measures are temporary.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 27
Example: the introduction of
discriminatory provision in the US
stimulus package
The American Recovery and Reinvestment Act (ARRA) adopted in
February 2009 included a provision which required the use of US
produced steel, iron and manufactured goods in public works funded by the
ARRA, subject to certain exceptions (public interest, non-availability or
unreasonable cost).
A second provision required the Department of
Homeland Security to procure US manufactured textile and apparel goods.
Following President Obama’s intervention, the ARRA requires that these
provisions be applied in a manner consistent with US obligations under
international agreements. Further, Congress has indicated that the "buy
American" provision for iron, steel and manufactured goods is not intended
to apply to LDCs.
However, US state and municipal governments will be able to impose
restrictions on the origin of steel and manufactured goods in procurement
28
markets.
Example:the introduction of
discriminatory provision in the
Chinese stimulus package
China also adopted a large stimulus package ( worth US$ 586 billion) at
the end of November 2008.
A notice issued by several central state agencies including the powerful
National Development and Reform Commission on May 26 2009 asserted
that purchasing by local governments had actually been biased in favour of
foreign suppliers . The notice requires that for the future Chinese
companies should receive contracts for government stimulus projects
unless Chinese companies can’t deliver certain technical goods at a
reasonable price or time frame.
29
Ex : The auto bailout plan in France
A controversy erupted in February 2009 as to whether the French auto
bailout plan was compatible with EU competition rules. On 5 February
2009, President Sarkozy had indicated that he wished that: “the movement
toward relocating plants outside France be stopped and that, if possible,
jobs be repatriated to France” He added: “If financial aid is given to the
automobile sector for restructuring, it is on the condition that no new plant
will be moved to the Czech Republic or elsewhere”. On 10 February
2009, the EC Competition Commissioner’s suggested that such aid would
be illegal under EU competition rules. That same day, the EU presidency
(exercised under the rotation system by the President of the Czech
Republic) denounced the “ protectionism” of the French Government. So
did the German Government. On on 27 February 2009 the Commission
finally approved the aid measures.
30
Conclusion III
-Stimulus packages may have discriminatory and/or anticompetitive
effects by design (cf Buy American Act);
-It is often because governments fearing that ( economic) leaks may
benefit foreigners, insert discriminatory conditions into their fiscal
programs to prevent such seepage when they consider using budgetary
deficits as a means to support demand ( ex French automobile industry
bail out)
-Adoption of discriminatory and anticompetitive rules leads to retorsions (
cf China Buy Chinese Act)
- International pressure is in some cases sufficient to eliminate some
discriminatory and anticompetitive aspects of stimulus packages but not in
other cases ( see the difference between US and China)
31
Measures adopted by governments
in a period of crisis
4) Protectionist measures
-Direct protectionist border measures
-Imposition of antidumping duties
-Tariff increases
-Non tariff barriers
32
Risks of protectionist measures as a
response to the crisis
Stimulus package
At this juncture, European businesses also face the additional risk of an
increase in the recent resurgence of protectionist tendencies globally which are
reflected in various types of measures, often below the threshold of being
actionable but with the potential of triggering an avalanche of "tit for tat"
responses.
Ensuring that measures supporting the business environment through the crisis
do not contribute to such developments will be crucial. Preventing that remains
an important task for monitoring and coordination going forward.
Economic Crisis in Europe: Causes, Consequences and Responses EUROPEAN ECONOMY 7|2009 33
Protectionist measures
We commit to fight all forms of protectionism and maintain open trade and
investment
Communiqué following the G-20 meeting in the U.K., Sunday March 15
2009
But
- Early in 2009, the US congress adopted a Buy American provision in the
economic stimulus package
-The US is preparing to impose antidumping duties on Chinese steel
imports
-In 2008 India imposed safeguard measures on steel imports
-In early 2009 France adopted measures to subsidize potential buyers of
Airbus planes ( 5 billion euros) etc…..
-In early 2009 France considered conditioning state aid to the
automobile industry on repatriation of plants on French territory.
34
The trade coverage of crisis-era
protectionism
Of the beggar-thy-neighbour state measures taken since the first crisisrelated G-20 summit in November 2008, nearly 650 have yet to be
reversed.
(…)
A total of 22 so-called jumbo measures were identified here and then
analysed.
(…)
The trade coverage of these jumbo measures is equivalent to more than
ten percent of world imports.
This level of trade coverage makes crisis-era protectionism a trillion-dollar
phenomenon worthy of greater attention from policymakers
Simon J. Evenett and Johannes Fritz: "Jumbo" discriminatory measures and the trade
35
coverage of crisis-era protectionism, 21 June 2010
Table 1. The list of jumbo discriminatory measures, presented in descending order
of trade covered.
36
37
The role of competition authorities
in a time of crisis
38
Possible enforcement strategies for
competition authorities in the near future
1) Denial: Nothing has happened which should lead competition authorities to
do anything differently ( the crisis happened because we did not rely
enough on unregulated competitive market mechanisms) (Business as
usual)
2) Panic: The exclusive focus on consumer welfare is untenable in a period
characterized by a deep financial and economic crisis calls for more
regulation and protectionist policies. We have to go back to the antitrust
goals of the 1960’s which were more concerned with distributional issues
3) Adjustment: We should keep the same goals and standards but
acknowledge that the macroeconomic context in which we are enforcing
competition is different from the past and acknowledge that this is going to
influence antitrust enforcement.
39
Role of competition authorities in
crisis
1) Help design adequate regulations
2) Help design and/or control rescue packages ( particularly: conditions of
aids, sunset clauses, rendez vous clauses, evaluation, etc….)
3) Control of protectionist measures ( are US and EU competition
authorities right to abstain from intervening in antidumping
proceedings?)
4) Merger control
5) Control of anticompetitive practices by firms
6) Take up new issues
40
1) Interventions of competition
authorities in the regulatory process
-Consultation/Advocacy
Ex: US Banking mergers ( DOJ and FED simultaneous competition
assessments)
But US lack of consultation of FTC on automobile bailout package
-Participation in governmental decision making process
-Ex: Status of Korean KFTC chairman; is there a trade off between
independence and influence
-Control of impact of government interventions on competition
-Ex EC State Aid Control, France (binding opinions of competition authority in
some cases).
41
2) Possible enforcement
adjustments in a time of crisis
-Case selection (more pressure to take up socially relevant cases in a time
of economic depression
-Procedural flexibility ( ex week end reviews of bznke mergers or bail out
plans)
-Interim measures/ preliminary injonctions ( increased fragility of some
firms)
-Cartel enforcement ( likelihood of increased frequency of cartels but
increased instability of cartels)
-Potential competition ( decrease in the fluidity of reallocation of
resources, lower intensity of potential or actual competition due to sharp
decline in international trade)
42
Possible enforcement adjustments
in a time of crisis
-Abuse of dominance/monopolization ( more concern about ensuring that
dominant position do not impair entry, toward a revision of Trinko?)
-Mergers (more frequent use of the failing firm doctrine)
- Merger remedies (possible difficulties to impose divestitures because of
paucity of potential buyers hence either longer delays
granted for divestiture or shift toward behavioural remedies)
43
3) Possible agenda for the postrecovery period
1) Renewed attention to the way in which constraints/rewards shape
performance at the micro level (incentive structures)
2) Renewed focus on
principal-agent
structures (board governance)
relationship
in
corporate
3) Risk as a dimension of economic performance ( possible developments
toward behavioural economics)
4) Issue of social responsibility of firms (employement, compensation,
environment, climate etc…..)
5) Relationship between regulation and competition
44
Conclusion
Competition is not part of the problem but it is definitely part of the
solution.
What we have learned from the crisis is that short run profit maximization (
by bankers) combined with excessive risk taking without consideration
for long term economic development can have catastrophic results.
This lesson also applies to the remedies used in a period of crisis.
Competition authorities have an important role to play in the coming
years.
45
Thank you for your attention
frederic. jenny@gmail.com
46