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between the benefits of competition (in terms of efficiency, quality provision, innovation and international competitiveness) and the potential increase in instability. Regulation was tight and central banks in Europe were too complacent with collusive agreements among banks, sometimes even fostering them. The costs of tight regulation should be apparent. For example, rate regulation induces overinvestment in services, excess entry, and introduces the possibility of regulatory capture. The situation has now changed and currently the three main areas of competition policy, mergers, cartels and abuse of a dominant position, as well as the rules concerning state aid, apply fully to the banking sector.

Several points concerning the development and the current design of competition policy are worth being stressed. In the US the de facto antitrust exemption for banking ended with the Supreme Court decisions in 1944, 1963 and 1964; but the criteria for the evaluation of mergers are still somewhat more lax than those used in other sectors. The safe heaven thresholds for the Herfindahl index below which a merger is not challenged are higher for banking than for other industries.5 Furthermore, mergers are analyzed and decided upon by the relevant regulator (OCC, FDIC or FED) with the DOJ conducting a parallel review which may result in an appeal against the decision of the regulator. This arrangement created several problems in the past as the DOJ appealed against the decision of the Fed three times between 1990 and 1992, and required from the merging parties more divestitures than the Fed in seven cases between 1997 and 1999.6

The European Commission did not apply the old articles 85 and 86 of the Rome Treaty till the Zuechner case in the early 1980s. This was because banking was seen as a special sector, where business was heavily influenced by the monetary and financial policies of member state authorities, in particular central banks and supervisors, rather than by market forces (Ghezzi and Magnani, 1998).

5

Bank mergers are not challenged if the HHI does not increase by more than 200 above 1800 of if parties’ market share is below 35%.

6

The appeals concerned the cases First Interstate of Hawaii/First Hawaiian and Fleet/Norstar in 1991 and Society Corporation/Ameristrust Corporation in 1992.

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