Competition Policy and the 2008 Financial Crisis

About the crisis

There are no doubts about the fact that the current economic crisis, started about a year ago, is one of the worst the market has experimented in modern times. In some important economic magazines, such as Financial Times and Wall Street Journal, many are the comparison made with the crisis happened in the ’30; the dreadful word “depression” appears in many articles, like a possible future outcome of this crisis. Data somehow support a pessimistic vision: the week from October 6th to 10th 2008 is the worst ever for the Dow Jones Industrial Average: the decline was in the order of 18%. Another record related with the Dow Jones with negative implication is that Friday was the most volatile day ever for this index; even the total trading volume of stocks listed on the NYSE hit a record, 11.16 billion shares.
US markets are not the only ones to be affected to this crisis: European and Asian markets fell consistently in those days, but the trend is pointing downward since a year. Many effects can be observed (are to be seen in the near future): one of the most striking is probably the fact that an entire state, Iceland, is risking a national bankruptcy.
Many observers point at the deregulation in the financial markets (especially in US, carried out by Alan Greenspan, being the Chairman of Federal Reserve between 1987 and 2006) as the main responsible for the current crisis. Consequence of the deregulation is the creation and subsequent boom of derivatives (financial instruments whose values depend on the value of other underlying financial instruments). Thus, it is probable that to cope with the current crisis governments will change completely direction, moving from deregulation towards a more strict set of rules and attitudes: example of this can already be found in the increasing number of interventions of US federal state in the market in order to save troubled companies (Fannie Mae, Freddie Mac and AIG are the most notable examples). This process will most likely affect even areas not directly related with financial market, such as competition policies.

Competition policies before the crisis

Competition policies applied around the world proved to be somehow efficient and many were the activities that led, for example, to uncover the existence of many cartels or the anti-competitive behavior of dominant firm. The most recent example of this fact are the fines imposed by the European Commission to a cartel formed by European and non-European firms to control the market of the paraffin wax, a material used in a big variety of households items.
Many were the accomplishment and the progress made by competition law authorities all over the world: very important is the level of cooperation reached among them, like for example the creation of ICN (International Competition Network)

Possible effects of the crisis on competition policies

Federico

The following paragraph is an opinion of the writer (Federico Facchinelli) so read them and consider them consequently.
I think this crisis will have negative effects on the cooperation process: reactions to this crisis will be probably guided by fear and distrust, weakening the will to cooperate. I don’t mean that the cooperation will end abruptly, just there will be a slowdown in the momentum for cooperation among competition law authorities.

Another effect of the crisis will be that many policies, especially about state help and mergers, are not suitable for such a hard moment: exceptions will happen (some have already taken place), and many rules and policies will be changed. This is not negative per se, but decisions made during crisis times are deemed to be focused in the short-term view (“just survive until the crisis is over”), not considering enough the long-term view. At the end of the crisis we will be in a situation in which many rules will be ill-conceived for normal times: it is possible that competition law policies will be more based on political views, rather then based on economic reasoning.

In my opinion, a clampdown in the regulations will be experienced all over the world, obviously with differences and exceptions: this will be caused by a feeling of distrust for markets in the common people, but even in the policy-makers, due to the terrible effects of the current crisis. In regard with competition policies, the introduction of criminal sanctions (in legislations that do not apply them yet) for people involved in hardcore cartels activities is likely to be part of this clampdown. This is only a notable example: many will be, as discussed before, the changes in competition law policies. I think that the direction of this change will be towards strictness, not only in regards with competition, and especially in the financial sector.

Camilla

The following paragraph is an opinion of the writer (Camilla Cisterna) so read them and consider them consequently.

Financial market crisis as a perfect opportunity for closer European integration policy.

The dramatic events that affected the financial market over the past few weeks are going to shape a new look not only of the financial world but also of the international market economy in terms of policy and regulation.
For instance, we can expect that the financial world will become more local because the investors will feel themselves safer in their own country with the protection of both their governments and their institutions. This reaction can be easily taken not only as lack of trust in the banking system at the international level but also as need of more transparency from the companies managing investors money and in the products that they market.

As a result, national and international authorities will play a very crucial role.
In fact, we know that achieving an integrated market for banks and financial conglomerates is a core component of the European policy in the area of financial services, but we did not see yet a coordinated action from the European authorities in the face of a global crisis. In contrast, many national state interventions took place during the past few days such as an increase of levels of deposit protection by Germany soon followed by Denmark, Iceland, Sweden and Portugal. The Italian premier Mr Berlusconi said that “all European leaders will adopt the necessary measures to maintain the stability of the financial system, through liquidity injections, specific action on individual banks or reinforcing the protection scheme for depositors”. However, the enthusiasm over national schemes might be misplaced because this might create an incentive for savers to move their deposits from a country to another in which they can find a more “generous” deposit guarantee. This in turn could cause problems among Member State within Europe instead to regain financial stability.

Consequently, European Member State should take concerted actions in order to civilize financial market against excess and speculation and at the same time to achieve more economical and political integration. According to the French leader Mr Sarkozy, the world and more precisely the European Union have to learn the lesson of the financial crisis and rethink the values and practices of globalization. He said that this would mean shifting the emphasis from speculation to entrepreneurship and restoring a proper balance between the market and the state. Another important thing that Mr Sarkozy said is that the European Union cannot continue to manage the 21st century economy with the institution of the 20th century.
Therefore, as we could see above there are some reasons to believe in a need of a new institution at least at European Union level. This institution should be able to make a “global” plan that take into account the European interest as whole into an international environment in order to re-estabilish the idea of capitalism founded on the ethic of effort, fair rewards and hard work. The key policy instrument to achieve this goal is the development, implementation and application of EU banking and financial conglomerates legislation with all stakeholders, covering prudential rules for credit institutions and investment firms.

From what we have said until now it is possible to infer that the financial and banking system will be more heavily regulated and monitored and this will imply complex structural changes that the “market system” will only be able to accommodate over time.
Unfortunately, in responding to crisis, policy actions are always risky and costly. However, the policy actions will have less unintended consequences and more effectiveness if they are the result of the Member State’s synergies in building an increasingly globalized world market.

Caterina

The following paragraph is an opinion of the writer (Caterina Fontana) so read them and consider them consequently.

In the last weeks we witnessed the explosion of the financial crisis unleashed by the subprime loans crisis, that was in the air since last year.
From a European point of view, it seems that the laissez-faire perspective of the U.S. policies turned out to be a sort of “deregulation” of the financial markets, that allowed the present situation to develop.
Having granted loans to unreliable debtors on the estate market, and having seen the estate market collapsing, the American banks had no reasons not to hide what was really going on, and try to sell options on the subprime loans…until investors started asking to be paid back!
When the financial market is supported by “prime” debtors, paying regularly they’re installments, certain amount of money, exceeding the liquid assets, can be invested into risky activities without problems. But as someone begins to ask his money back, problems will rise with banks that are physically cash-free.
The loan-to-value ratio of American banks was not sufficiently controlled nor regulated.
Given an average value for the world ratio around 1:3, we see some of the biggest banks of the world having a ratio of 1:60! This means that probably the deregulation failed to guide us toward the perfect and free competition world that U.S. thinks to implement, but possibly giving too much power to risk takers heading financial institutes.
When the estate market, main and more risky debtor of these banks, collapsed, the ratio raised quickly up, feeding the worries about a possible insolvency of those same debts.
The truth is that in the last years we have witnessed an unseen credit boom followed by the usual euphoria and over-optimistic valuations of a boom phase.
Banks’ capital was adequate seen under this favorable scenario but not to face a consistent shock, as this crisis is.
Will a bank with a leverage of 1:60 be able to pay creditors who are no more disposable nor trust full enough to have their money invested?
This question activated a psychological reaction of raising mistrust among banks and, secondly, among governments, stirring up people’s fears and panic and freezing the financial market.
Even if the real economy is still working properly, it won’t delay to feel the effects of the collapse.
Undoubtedly the U.S. preference for permissive rules helped, or at least didn’t hampered, the banks’ behavior about subprime loans.
It’s not the goal of this paper to analyze the detailed causes of the crisis, but it seems to be crucial that the different European attitude, toward public inference into the market, has contributed to face the coming crisis, giving the European banks the power to resist (even if not without any support) to the U.S. attempts to make us “absorbing” they’re lack of cash.
Probably the crisis might rationally be solved just starting to trust each other again, but we don’t live in a perfect world, and it’s obvious that we need several interventions by nations, to face the emergency and prevent a new slump.
The second issue has been largely discussed in the last days, as it concerns the public intervention by States and its nature and organization.
U.S. government, after a first attempt to let the market work, declaring that since the practices on the table are essential parts of the free market, prohibition of such sales might result in the destruction of the market, had to face the fact that this autonomous market can’t get up without any help. This process of regulation of the U.S. financial market will require considerable future effort and patience, but it is still fundamental to prevent such crisis to happen again.
In the last days we saw a race of the European governments to guarantee the bank deposits, in order to restore the trustiness on customers, but someone argued that this is not the final goal of the new policies that will arise for sure in the next months as aftermath effects of the crisis.
As the problem is embedded in the inter-banks system, probably the grants-system by governments is not a definitive answer to the illness that the system has shown us.
First of all because in a long-term perspective, it will distort the competition among banks and financial institututions.
Ireland, Germany, Italy, Spain, and many others are facing the mistrust giving guarantees, but, after the market will start working again, it will not worth as much as a deep analysis of the law system ruling the financial market, maybe deciding for a further transparency, simplicity, clearness and fairness of the banks’ activities.
As the lack of liquid assets it’s not able to be faced without the intervention of the central banks, even the U.S. principles on public interventions has to bend to the common interest satisfaction.
In my opinion this is and will be just temporary, even in Europe, where the public intervention is more appreciated.
No doubts that in this specific moment we need to avoid the total collapse of the world economy, by allowing a sort of nationalization of the monetary system, but I believe that after this first instinctive dread of crisis, governments will work together (they’re also talking about enlarging the G8) to restore the system, maybe with significance changes in terms of regulation, but without any further interference of the State in the banks’ activities. This because I think that the political and monetary powers should be kept divided in order to guarantee a balanced development of economy.
What I mean is that politicians are, from my point of view, having the power to control financial markets just as long as these markets are frozen as they are now.
As money are not disappearing from the world, I think that, faced the psychological reaction to the collapse, the economy will be back as it was before, but with minor interventions to prevent a relapse.
About spin-offs, I think there will be several small companies collapsing before we manage to restart the engine, and I think that the governmental intervention should and will be at the incentives level, acting on interest rates, to prevent small debtors or creditor to be suffocated by the crisis, without affecting the normal competition practices directly.
That’s why, I believe, someone is talking about a further liberalization of the financial market as a matter of discussion in the crisis aftermath, with a further presence of foreign banks in all the countries, accompanied by the mandatory requirement of more transparency and comparability among banks’ commercial and financial offers.
In the U.S., they’re facing the crisis injecting liquidity in the monetary markets, so to incentivize the reprisal of the free market, with the perspective of a reformed law system about bank contracts and allowed activities.
In Europe the main problem is the leverage effect of the international banks, so the interventions will aim to recapitalize the main banks. This is happening at national levels, but I think it will be soon transferred at the European level, as the integration of the European markets has gone too far to let the single governments act alone and independently.
I think the administrations will alter the regulatory structure, but probably there will be no changes in the non-written legislation that helped to encourage the proliferation of high-risk activities.
Perhaps the biggest long-term distortion in the housing market came from the longstanding deduction for mortgage interest, which encouraged overinvestment in real estate, so perhaps there will be a deeper action on correlated instruments affecting the financial market, so not to touch the competition policy and the competition practices.
Probably regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions. In finance, trillions of dollars change hands, market players are very sophisticated, and much of the activity takes place outside the national boundaries or easily could.
Under these circumstances, the real issue is to set regulatory priorities to prevent frauds and to encourage market transparency, working at the international level.
It’s easy to say that the administrations should taken care of the banks’ problem, but I think we should analyze the actual regulations in order to find out a clear explanation of why existing regulation failed in the past.
Trying to coordinate and harmonize the regulatory systems internationally, the result will possibly be a more free competition in the financial market, without direct or indirect distortions.

Silvia D.

The following paragraph is an opinion of the writer (Silvia Decarli) so read them and consider them consequently.

Certainly after the globalization process also the financial market is opener than in the past, thus there are more competitors and more opportunities. This process permitted to the information and the events to expand very quickly in many markets even if these are very distant from each other.
That is what happened this year with the financial crisis, began in the USA due to the boom of the American immovable property market. This latter event happened because the American banks decreased the prudence level about the concession of their bank loan and so they increased their risk level. The derived speculation led to a big financial crisis that expanded all over the world with a chain of bank failures. This crisis involved (and involves) also many world financial groups.
The main consequence of this dramatic event is that the free market is quite substituted with a “nationalized market”. It’s so because most government had to intervene and to fund many governmental aids to those banks that were about to fail. This fact distorts the basic rules of the competition policy because influences the free tendency of the market and of the relationships among undertakings. Among the governmental bailouts, there are many non-financial ones, like the US-auto industry, that take advantage of this crisis.
Another fact, out of the normal market process, is the decision to modify the discount rate by the Federal Reserve, the European Central Bank (and other central banks of other countries) to reduce the money cost trying to improve the economic situations of the banks.
The competition Authorities have to pay attention to the new big financial companies that now are growing through mergers and acquisitions at very low price of almost failed banks. These companies intend to “clean” the financial market but doing so, thanks to the governmental aids, they will become too big to fail, and this is not a “market cleanliness”. It’s for this reason that the competition Authorities have to check that new horizontal or vertical cartels don’t arise, fixing prices (interest rate) or abusing of dominant position, distorting in this way the financial market.
Another important consequence, linked to the preceding one, is that the antitrust decisions are taken with a political prospective and not with an objective point of view. Thus the decisions lose their economic reasons and they are no more based on the efficiency and competence.
In my opinion, the financial crisis brought new problems and new opportunities to those companies that want to dominate the relative market. Thus, the competition policy has a very important role in this difficult period because it has to guarantee the normal functioning of the market and to ensure that the consumers are protected.
The consumers, in this period, are the weakest operators on the market because they don’t enjoy of symmetric information, so they can’t understand all what is going on the market and they haven’t at disposal all the necessary information to reach optimal decisions and understand if a financial intermediary is saying the truth or not.

Olga Alyabieva

Over the last several months economists concentrate a lot on the consequences of the current global financial crisis and its influence on the world economic situation and competition policy as well. Numerous discussions, papers and conferences try to give their explanations on what will happen in the future world and how governments and political institutions need to behave in order to create a sustainable competitive economy.
However, not so many analysts say about the interrelation of the financial crisis and competition policy. Most of studies explore only the effects of the financial crisis on the economic policy. But, competition policy plays nowadays a great role in the economics arena and it is a very contradictory topic of how the global financial market can influence the international competition policy.
For example, Franklin Allen (2003) in his research “Competition and financial stability” finds that the increasing competition causes the financial instability. In fact, lots of empirical studies prove this fact. But I think it does not mean that competition authorities should stop all competition activities in order to have financial stability, they just need to protect both international and national markets more carefully.
In my view, this current financial crisis will make competition institutions work harder, faster and in more cooperation, because the world breakdown has shown that globalization process need more “collective leadership” than “unilateral leadership” with more responsibility of each country in the world. In addition, local country authorities probably will try to focus more on the protection of the local markets in order to decrease the effect of the international influence. So, we can face the fact of eliminating cooperation from the other hand.
Another point is here, that the crucial role of the competition competencies will be in the merger and acquisition cases, which, I think, will take more and more times after this crisis. In fact, lots of companies now try to buy another firm and make a merge to get bigger power in the market or survive. For example, we can consider the cases with Bank of America and Merrill Lynch; Citibank, Fargo Bank and Wachovia Bank and some other cases. So, competition authorities should take more careful approach in making appraisal of the effect of the M&A events.
In addition, we should also consider the political issues in the current financial crisis. A lot will depend on the American presidential elections and actions and cooperation of the Big 8 countries. Now we see that Europe and the USA try to take different actions to rescue the economy. What the consequences of these actions we will see in the nearest future.
Finally, summarizing all above, it can be concluded that the current global financial crisis will influence the international competition policy in many ways: they will work in a closer cooperation at the same time protecting domestic markets, get more careful approach to the policies and especially M&A cases, take in account political issues and interests of the national markets.

Stefano Frizzera

Competition policy in the „aftermath“ of the 2008 crisis on the financial markets

The 2008 financial crisis is affecting millions of persons expecially among Americans. It began 13 months ago in the United States because of investements based on pure speculation. Many factors were involved into this crisis such as the subprime lendings and derivatives. Financial institution started assuming high risk by lending money also to individuals that could not afford these loans. They all wanted to buy the same thing which increased demand and caused inflation.
Cheap credit enabled people to buy houses or to make investment just for speculative reasons because banks offered easy initial terms to loan and individuals, seeing a long-term trend of rising housing prices, were encouraged to take difficult mortgages in the belief they would be able to gain money by reselling them in the future. Credit became unchecked and it got out of control.When subprime mortages crisis occurred, borrowers were no longer able to pay back the loans. This caused a downward spiral because the banks had not an adequate hedging system so that the lack of liquidity put the banks in the position in which they were unable to lend money to the companies and businesses and they, in turn, could not survive without loans. All this situation was increased owing to the globalization that permits to the events to spread all over the world in a very quickly way creating a chain of bankruptcies.
In order to limit the crisis, governments must help the banking system to protect financial stability providing public guarantees for banks. America planned to give 700 billion of dollars to rescue the financial market. Also European national government must help their markets. Some aids have already been given to some banks to avoid insolvency and more help will have to be given in the future. Of couse all these transfers affect competition among businesses putting under pressure the European common market. However all the States gave, with different amounts of money, aids to their banks. Some countries even nationalized some bank institutions. For these reasons ( that all the country gave help) it has been possible to “break” the rules about competition and enforce a more flexible “transfer system”. But this does not mean that Governments can give money in a completely free way, in fact the European Commission checks that the bailouts are related to the crisis and necessary. Some countries claim that the Antitrust acts in a too strictly way.
All this situation put under discussion the opinions of those people who think that a completely deregulated market (and then more competitive) is the best one because they think that it is able to reach a “self-regulation”.
This crisis is yet the result of an “unchecked market” where the government intervention was the least and then it is important to review the State position into the market and the policy about “liberalizations” of some sectors that might be dangerous for citizens. On the other hand, a greater State intervention into che competition market could push itself toward the “protectionism” that is not good for the sake of the constumers.
For these reasons it is undoubted that government and European Union will have to revise the “competition policy” in terms of “regulation” and “deregulation” in order to avoid speculations hurting individuals.

Silvia Roncari

The crisis of the financial market which is currently going on and it is spreading rapidly from the United States to all over the world, represents the failure of the self-adjusting mechanisms of the free market economy (of which the US have always interpreted an excellent example) and has lead to the Government intervention which unavoidably affects the competition both at the national and international levels.
From a national point of view, the increase of the money supply provided by the US Government in order to fill up the financial holes has lead to the deflation (e.g. the houses has lost their value) and to the reduction of the consumption and, as a consequence, the banks are no more willing (and actually able) to give credit to businesses which, in turn, cannot invest and develop new technological innovations in order to compete in an efficient way on the market.
By analysing the issue from an international perspective, we realize that the 700 billion dollar aid promised by the US Goverment to the banks has triggered a chain reaction. In Europe, for instance, to bail out struggling banks the Irish Government made a blanket guarantee on deposits by inducing the other European countries to take the same decision in order to avoid the capital outflow towards Irish banks (e.g. Germany is doing actually the same).
Such interventions impede the self-regulation of the capitalism system (which is, as seen in the US, no more reliable) by limiting competition and can lead to the abuse of dominant position (as in the case of Irish banks compared to the other EU banks). But on the other hand they are necessary to protect investors and allow firms to get a loan and improve their business.
There is also a positive effect of the crisis in the stock markets: companies providing “empty” shares with a fictitious value based upon the willingness to take more risks rather than representing an increase in the real value will be replaced by companies offering goods or services whose value is concretely estimated. In this way, the competition will be more transparent and based upon technological innovation and improvement of the quality instead of “financial bubbles”.
In conclusion, we are facing a change in the world economic setting moving from a liberal approach where “the more you risk the more you get” to a “nationalistic” approach where national interest prevails the individual one.

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