In 2008 the world witnessed one of the most devastating financial crises in recent history. Its force swept away several of the most powerful US investment banks, bankrupted mighty US and EU commercial banks and dried up banks’ capital worldwide (Beck et al., 2010; Johnson and Kwak, 2010). The financial crisis brought severe economic recession, dumping national and global growth and causing cumulative banking losses in excess of a trillion Euros (Vives, 2010). The cost of recovery has been brutal, particularly to taxpayers, as governments found no choice than using public money to rescue major banks and uplift depressed economies. Up to 30% of the EU and US respective GDPs was spent in government bailouts and state aid directed to the banking sector (Vives, 2010). This put pressure on public budgets and forced governments to increase taxes and cut spending, worsening off the public at large.
Scholars have tried to identify and study the causes of the crisis with a view to avert, if at all, the next crisis. To many, failing to either draw the right lessons or take necessary action would make the next debacle inevitable (Johnson and Kwak, 2010). In this sense the overhaul of prudential laws and regulations is critical to preclude banks from undertaking excessively risky conduct (Claessens 2009; Beck et al., 2010). And so is a solution to the too-big-to-fail (TBTF) problem in banking. The crisis made apparent that big, universal banks do pose serious systemic problems where they become TBTF. The problem is that where TBTF banks fall they do it in an uncontrolled manner, producing knock-on or contagion effects which are severe enough to destabilize the entire banking system. The recent bailout by governments of TBTF banks was nothing but a massive, desperate effort to protect the entire system from imminent collapse (Wilmarth 2009 and 2010). Importantly, the crisis also told us that while competition policy in banking matters we still need to understand this policy better (Vives, 2010; Beck et al. 2010; Claessens 2009; IBC, 2011).
Competition in baking is critical to improve the performance of the sector in terms of greater cost efficiencies, product innovation, quality of service and access to finance (Claessens 2009). And although some evidence suggests that competition can lead firms to take excessive risks in detriment of financial stability (Jiménez and Lopez, 2007; Vives, 2010) this need not occur where adequate prudential rules and other institutional arrangements are in place (Claessens 2009; Beck et al., 2010). This being said, however, the crisis has made clear that competition policy in the banking sector cannot ignore the distinctive features of banking. There is consensus in the literature that, unlike other sectors, systemic problems are inherent to banking and, as such, competition policy must accommodate them (Vives, 2001 and 2010; Carletti, Spagnolo, Caiazza and Giannetti, 2010; Beck et al., 2010). The problem has been how to achieve this policy goal in practice.
In this sense, scholars have noted that current literature has yet to explain how competition and banking stability can be reconciled in the sector—in both crisis and non-crisis scenarios (Claessens 2009; Beck et al., 2010; Vives, 2010; Carletti, Spagnolo, Caiazza and Giannetti, 2010; ICB, 2011). They have called for further research to fill this gap, including the study of how merger policy can meet the challenge (Carletti, Spagnolo, Caiazza and Giannetti, 2010; Shull, 2010; Carletti and Vives, 2008; Bagcy and Muysert, 2010). Merger policy regulates the process of industry concentration. Important questions that merit further research may include how key variables such as firm size, market power and competition relate to risk taking and banking stability, or what role a competition authority ought to play in banking mergers. Since the extent to which merger policy may contribute to reconcile competition and stability in banking is not yet fully understood, more insights into this area can be helpful to efforts aimed at diminishing the likelihood of future, costly crisis in the sector.
Félix E Mezzanotte (Hong Kong Polytechnic University)
http://www.af.polyu.edu.hk/profile/staff_felixmezzanotte.html
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