MYKOLAS ROMERIS UNIVERSITY
FACULTY OF LAW
INSTITUTE OF PRIVATE LAW
EUROPEAN AND INTERNATIONAL BUSINESS LAW
Application of Competition Law in the Banking Sector
Prof. Dr. Raimundas Moisejevas
NATURE OF BANKING SECTOR AND APPLICATION OF COMPETITION LAW IN IT…………………………………………..……10
CREDIT CARD MULTILATERAL INTERCHANGE FEES AS RESTRICTIONS OF COMPETITION…………………………………..…15
Practical issues related to the interchange fees of the bank cards……18
Collision of the Mastercard and VISA cases. The analysis of the jurisprudence………………………………………………………….25
STATE AID IN THE BANKING SECTOR – IS IT A REAL LIFEBUOY?…………….………………………………………………………31
Matter of distortion of competition law in the case of State Aid…….34
State Aid during the financial crisis 2008 and its impact on the competition law………………………………………………………38
Analysis of the case law on State Aid………………………………..41
MERGER IN THE BANKING SECTOR – AMBIGUOUS SOLUTION OR AN ISSUE……………………………………………………………….…..49
Mergers of the bank threatens the competition stability – when and why……………………………………………………………………53
Analysis of the effect of mergers in the case law……………….……58
CONCLUSIONS AND RECOMMENDATIONS………………………………62
DECLARATION ON INDEPENDENCE OF THE MASTER THESIS……….77
ATM – an automated teller machine
BER – Block Exemption Regulation
CC – Competition Commission
EC – European Commission
ECJ – European Court of Justice
EEA – European Economic Area
EEC – European Economic Community
EU – European Union
G20 – Group of Twenty (is an international forum for the governments and central bank governors from Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, the Russian Federation, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, and the European Union.)
GDP – Gross domestic product
LVL – Latvian lat (currency)
MIF – Multi-interchange fee
MPS – Monte dei Paschi di Siena S.p.A. (a bank)
MS – Member State
OECD – Organisation for Economic Co-operation and Development
TFEU – Treaty on the Functioning of the European Union
Statement of topic. Competition law protects the economic interests of consumers, competitors, the economy and the market. As a science, competition law has an impact on a complex of other spheres, not only in a classic legal system but also in economics, political science, sociology, even psychology and other related branches. It is important to realise an influence of this study not only among the lawyers, economists, but also other professionals, who are facing in everyday life such terms and definitions as “effective competition”, ”business” and ”market”. In general, each entrepreneur should be familiar with a concept of a competition law. With the visible successes of EU competition law regulation and its significance for the development of the European Union, it should be born in mind that competition policy is one of the forms of state intervention in the economy, the effectiveness of which has been disputed for many decades by representatives of various fields of both legal and economic research.
A theme “Application of a Competition Law in the Banking Sector” indicates not just a model, how competition law is implemented in a financial sphere and how it works, but points out some vital problems, which implies the need for a reform. Banking legislation aggregates a scope of different civil law rules, governing money relations between a bank and a client and such relations are formed when banks and financial institutions perform their activities. Very often this sector is going through the significant changes. And, as a result, consumers do not feel a proper level of security, while using the services of their financial institution. The most commonly used service of a banking sector for a private consumer is a payment card. Nowadays, it became an indispensable tool in everyday life. But as in same time for plurality of people it is just an easy way to buy what you need, for others it is an additional source of expenditure.
At the moment a customer uses his payment card to buy a certain thing from a seller, the acquiring bank pays the seller the sales price less a ‘merchant service charge’, the fee a seller must pay to his bank for accepting the card as a means of payment. Sellers pass on their costs for accepting card payments to their customers by raising retail prices. It turns out that a competition between banks is harmed, moreover, it entails an increase of prices on products and services for a consumer. But, as it was mentioned already, client of a bank is not only an individual consumer. More global issues have been on the agenda. For example, ”the scale of the financial and economic crisis that broke out in the autumn of 2008, and the systemic risks associated with it, were such that Member States used unprecedented amounts of State aid to the financial sector in order to restore financial stability and a normal functioning of financial markets, including EU companies’ continued access to credit.” Was it effective? Or in the contrary, the welfare of a consumer has been bended and it led to the distortion of the competition on the financial market globally?
The scientific research problem and the relevance. The author decided to choose as a theme of the thesis – ”Application of Competition Law in the Banking Sector” to analyse and to reveal weak spots of a financial sector related with competition law and to propose some recommendations. Author determined a geographical area of scrutiny – an application of competition law in banking sector in Europe (Baltic countries, France, Germany and other European countries). Since the financial crisis of 2007-2008, known as global financial crisis, in banking sector has happened also other transformations, for example, the European debt crisis which happened as a result of the Great Recession in 2009 , the “Refugee” Crisis in 2015 and, finally, Brexit, which is in a full process now, on a daily basis, financial institutions are facing with problems of payment cards and cartels, ambigue nature of a State Aid, as well as, financial technology and e-commerce harsh development which captivated the financial market.
The main legal research problem is obviously clear and is forming a question on which author will give an opinion in this thesis. Is an application of competition law in a banking sector just a formal requirement or a real working tool? Despite the conditions of high instability of this market and technological innovations, a healthy competition environment with a strict regulation is a basis of development of a market. In a specific sector, as a banking sector, this concept should be as a dominant principle in economic space and the free movement of financial services.
The relevance of this topic is determined by the fact, that at the moment the banking sector does not have the proper market stability. New members of a financial market, such as financial technology (called FinTech), political and economical affairs are pushing a banking sector to the innovation, especially in a sphere of competition law, as well, ten years after the crisis of 2008 has been passed and it is necessary to make an overview of results and mistakes. As well as, the analysis of the competition law application in the field of banking sector on the basis of literature sources and research works allows to conclude that there are insufficient studies of concrete issues, and this research will help to fill some gaps.
Review of the literature. Work on the thesis was conducted on the basis of a study of extensive regulatory and legal material, primarily the basic agreements of the European Communities.
Author has studied a multiplicity of scientific works, for example, a research of David Harrison about competition law and financial services, in his book author scrutinize an origin of competition law in a banking sector, for demonstrate in details how competition rules were built from the beginning and reinforces the theory with case law analysis, this work helps to designate the basic requirements of application of competition law in banking sector. Next author, Graham Cosmo, in his work ”Competition Law and Retail Banking”, analyses in details a transparency of bank fees and a directive of the European Commission which affects this issue, author has mentioned the works of Graham Cosmo, as his opinion is close to the authors’ position. On the contrary, Pierre Garello, a french economist who in his work ” Understanding Multilateral Interchange Fees (MIF), and ”Why it Would Be a Mistake to Regulate Them” was trying to justify the setting of the interchange fees by regulators, has expressed a point of view which differes from authors which proves that at the present, the level of scientific development of an integrated approach to the competition regulation of the banking sector does not meet the needs of theory and practice, since many provisions remain controversial, ambiguity remains in determining certain indicators of competitiveness in the financial services market.
A big part of master thesis is based on analysis of cases of European Court of Justice, European Commissions articles and, OECD report about bank competition and financial stability, which ”has been prepared by members of the Directorate of Financial and Enterprise Affairs at the OECD in Paris for the G20 Workshop “The New Financial Landscape.” As it seems to author the most reliable and argumented works. The regulatory framework and empirical basis of this research was constituted by the founding treaties and the legislation of the European Union in the field of competition, the practice of the Court of Justice of the European Union and the European Commission. Research “Application of Competition Law in the Banking Sector” will combine all sources and propose an original point of view with considering nowadays problems and tendencies.
Scientific novelty. The scientific novelty and significance of the thesis is expressed in that it is aimed at strengthening and systematizing the methodological foundations of scientific understanding of the problems associated with the development of legal models for the protection of competition in the European Union, contributing to the clarification of the patterns and main trends of international cooperation at the regional and interregional level in this area of ??public relations.
The chosen research problem has to be analysed periodically, for the reason of interminable changes in the above topics (the main issue in the application of competition law in banking sector was a crisis of 2008, which had a great impact on this sector, moreover, new financial technologies are gaining momentum), secondly, author will analyse thesis theme in different countries of Europe, what could give a possibility to gather enough information for highlight the strengths and weaknesses of application of competition law in a banking sector. The conclusions contained in the resarch also help to generalize the currently available empirical material on the thesis topic. The results of the study are significant both for European and international law, and for branch legal sciences, in particular, civil law, private international law.
The results of the research can be applied in educational and pedagogical activities, in particular, in teaching and studying courses in banking, competition and finance law, in conducting seminars with students of law and economic faculties of higher educational institutions, as well as in conducting research on relevant issues. This research can generate interest in both – the general public, as well as professionals in the field of law, economics, political science and business.
The aim. The aim of the research is to evaluate if the existing mechanisms of the competition law in the banking sector are still efficient or they need a reform.
Research objectives. In order to achieve such aim, the following objectives are particularized:
To reveal the weak spots of the banking sector in the sphere of a competition law which pose a threat to the correlation between stability and competition;
To indicate main issues in the payment card market and the state intervention perplexity;
To evaluate if a State Aid is restoring a financial stability in unforeseen situations and at the same time is keeping distortions of competition;
To assess wheter the main aspects of the mergers and acquisitions in the banking sector are aimed at ensuring efficient and competitive financial sector or this instrument is no longer relevant;
To discuss and to propose possible measures and resolutions concerning the financial market issues and application of competition law provisions in this sector.
Methods. In the research, the following methodology was used:
method of theoretical analysis of special literature and sources, as a basic mode, which formed the main issues in a sphere of interchange fees and payments with a bank card, State Aid influence on a financial stability and an ambiguous nature of the mergers and acquisitions;
empirical method, in particular, comparison of an application of a competitive law in a different European Union Member States;
analytical method with elements of analogies in a case study part, which constitutes the other half of the thesis.
The structure. Structure of a research consists of five main parts. The first part examines the main definitions of competition law application in a banking sector. The second part of a research is devoted to the analysis of antitrust investigation, this section is a main defining part of a problem of a topic, covering issues of interchange fees and analysis the case law, in a third part, author discloses the topic of the State Aid complication, in a fourth part author is researching and answering the question about the advisability of the merger in banking, and finally, in a fifth part, the results are summed up and certain resolutions are done.
The defended hypothesis of the Master Thesis:
Is the presumption that the existing mechanisms of the competition law in the banking sector should be adapted to the crisis circumstances and other critical circumstances and modernized according to the latest tendencies, in order to provide a protection not only to the market participants, but also to the entire economy of the country.To summarize the research, at the end author has done a number of conclusions and recommedations. In the research author used laws, regulations and directives, literature and internet resources.
NATURE OF BANKING SECTOR AND APPLICATION OF COMPETITION LAW IN IT
In a free market, business is a competitive game. Occasionally, companies want to avoid competition between themselves and try to dictate the rules of the game also by themselves. And sometimes it happens, that the biggest player can try to squeeze out competitors from the market. The health of the financial sector is of special importance to the real economy, as the sector is at the heart of every well-functioning market system. Banks perform intermediation functions that are critical to the real economy. When there’s vigorous competition in this market, the economy will benefit from higher quality and better value banking services. Conversely if competition is weakened or frustrated – whether through anti-competitive practices by businesses in the market, or through inherent features of the market – the incentives to offer consumers attractive prices and quality are correspondingly weakened.
But first of all, we should precisely define the concept of competition law. The concept underlying in the competition law regulation in the European Union is the recognition of the ability of the right to exert both positive and negative influence on the pace of economic development and its sustainability. Aim in the development of competition regulation in the EU is the desire to ensure the effective economic and social development of the EU Member States. For this reason, the competition law of the European Union includes norms not only restrictive and punitive but also social, and reflects the balance between the political, economic and social objectives of EU law.
Today, the application of competition law to the banking sector is raising important competition law issues in view of the process of harmonization implemented at European level with a main goal at assessing the level of competitiveness in the banking industry across the internal market, also in view of consideration relevant to the fact that the banking sector is subject to sector specific regulation.
European Commission and European Parliament are working with Member State governments and the European Central Bank to modernize the rules governing the European financial sector and to expand the single market of financial services. But why it is so important to apply competition law in this sector? Which spheres can be affected by ignorance or wrong application of the competition law? A tricky situation is, that banking is considered in the same way as any other sector and there is no special treatment of banks under EU competition law.
The question if a banking sector is also a field for a competition law, earlier, was quite actual. It was frequently said that since banking is a thoroughly regulated industry, there is no justification for the application of the competition laws to banking. However, the mere existence of a regulatory system has generally not been held to exclude the application of the it.
Now it is possible to examine Commission’s experience in their Notice on the application of EC Competition rules to cross-border credit transfers and to follow the long road with concrete conclusions. But some time ago it was complicate in practice to find a connecting link between banking sector and competition law. Nowadays it is thought out, that even in the most developed countries, with stable financial institutions and solid institutional infrastructures, the degree of effective competition in consumer and retail services still moves slower that in other financial services spheres. Further the traditional loan and deposit services, many wholesale products still demonstrate a big price difference, perhaps due to imperfect competition.
When we are speaking about banking industry, first thoughts that we are having are connected with fixity, stability and durability. But could we assume, that stability in a financial system and competition law application exist together on one level and successfully? According to the OECD summary on the theme of Competition, concentration and stability in the banking sector, ”the relationship between competition and stability is also ambiguous in the academic literature”.
Two antagonistic opinions can be distinguished in the theoretical work. The first one, called the ? charter value view, indiciates on a negative relationship between competition and stability. The second, the latest, is referring instead to a positive influence of competition on stability. ”The theoretical literature makes no distinction between competition and concentration, though. The empirical evidence provides a series of ambiguous and contrasting results, depending on the sample and period analyzed, and the proxies used for competition and financial stability.”
The financial sector is a separate sector. Banks perform an intermediation functions, essential to the real sphere of the economy. More specifically, they correct the asymmetry of information between investors and borrowers and direct savings towards investments. These functions facilitate and contribute to the growth of the economy. Linkages between banks via interbank markets and payment systems are essential for the functioning of capital markets. The loss of confidence in a leading financial institution during a financial crisis can result in a snowball effect to a loss of confidence in the overall market because a bank’s inability to cope to its obligations may render insolvent other banks. Risks therefore become systemic, thus endangering the entire banking sector. If the financial sector is not working well, the whole market economy is not working well. For this reason, governments impose significant regulation and oversight to ensure the smooth functioning of the financial sector. When problems arise, they must act quickly to avoid systemic crises.
When we are trying to understand the process of application of competition law in the banking sector, we can face with some problems. On the one hand, the standard competitive paradigm does not work because of features like asymmetric information in corporate relationships, switching costs and networks in retail banking. On the other hand, some banks’ specificities, like the fact that they compete for loans and deposits, can lead to departures from the competitive outcome as banks may want to corner one market to achieve monopoly in the other.
On 11 June 2002 the Commission concluded its first full-blown cartel inquiry into the banking sector by imposing fines totalling € 124,26 million on eight Austrian banks for their participation in a wide-ranging price cartel dubbed the ‘Lombard Club’, covering the entire Austrian territory. In the Commission’s analysis, the banks’ behaviour amounted to a single, complex infringement of Article 81 EC (now – 101 Article). Those aspects that do not qualify as agreements certainly constitute concerted practices, systematically eliminating uncertainty about the competitors’ next competitive moves. Given that most Austrian banks participated in the cartel to a certain degree the Commission has selected the addressees of the present decision on the basis of objective criteria, i.e., the intensity of their involvement in the most important commitees.
We can say that Lombard case epitomizes the difficulties arising from the application of Article 101 to banking systems of Member States traditionally based on intensive forms of cooperation between banking undertakings and not accustomed to a bare exposition to antitrust rules. On this example, the sense of the link between the competition law and the banking sector is clearly detectable.
With the visible successes of EU competition law regulation and its significance for the development of the European Union it could seem that the competition policy is one of the forms of state intervention in the economy, the effectiveness of which has been disputed for many decades by representatives of various fields of both legal and economic research.
The supranational interference from the part of EU institutions looks like an analogue of the state intervention and is equally criticized. The essence of the problem is that the negative consequences associated with supranational antimonopoly regulation, ensuring not only effective protection of competition, but also harmonious economic development of the Union as a whole and its members, in particular. Regardless of the degree of interference of the state and supranational bodies in market mechanisms, there are forms of activity of economic entities that are considered illegal by its definition. This concerns, first of all, abuse of the dominant position, as well as agreements which restrict the competition (for example, cartel agreements), and concerted actions of economic entities operating on the same target market.
Financial services markets are increasingly dealing with financial instruments, among which an important place is occupied by completely new, previously unknown tools. Banking markets attract the newest products, such as FinTech, smartcards, crypto-currency and others. It is difficult to predict today which approach competition authorities and especially the European Commission, will use in the nearest future to determine competitive behaviour of FinTech companies and newest technological bank products. In a very quickly dynamic markets, the target should not decidedly be on the market position of the consistent business entities, but preferably on the issue whether consumers are being harmed. This why, it is fear to affirm that the link between the banking sector and competition law should consolidate and develop, by demonstrating more transparency, because already in the framework of FinTech, the European Commission has indicated clearly the danger that existing participants, among which mobile device producers and operating system providers, decline to provide certain access to third parties and attempt to defend their position as protector. The EC has mentioned that there is confirmation affirming that the particular big business entities deny access to new companies, or that they only allow to access on contradictory requirments or ‘lock-ins’.
In the following chapters, author will focus on the main issues in a banking sector which are relating to the most important anticompetitive agreements, mergers and to the state aid.
CREDIT CARD MULTILATERAL INTERCHANGE FEES AS RESTRICTIONS OF COMPETITION
The first issue in a banking sphere concerning the competition regulation is connected with a Multilateral Interchange Fees. Before understanding what interchange commissions are and discussing the foreseeable consequences of various regulations it is essential to recall the origin and effects of this means of scriptural payment that is the bank card. We got used to the three principal means of payment which were used by economic agents – coins and banknotes, checks and bank transfers to banks. These means were not universal: a currency was rarely accepted as a means of payment outside its territory. It was the same for checks that sometimes saw themselves even refused in the territory of the merchant bank (we all saw, and continue to see signs ”We refuse checks” in many public places in particular countries). As for bank transfers to banks, their complexity and cost meant that they were seriously considered only for transfers of large sums of money.
Today, bank cards (debit or credit) are the first means of payment in European Union and more generally in advanced economies. The cards are accepted by a growing number of people both in the country of the banking world and in foreign countries. This tendence gives u san idea, that a bank card compete with other ways of payment and that a bank card have so far gained the preference of consumers, traders and companies and somehow it developped a system, which looks like a platform of payments. So it became a main innovation; to ensure that this method of payment which is accepted by all.
In other words, the main economic contribution of companies such as MasterCard or Visa lies in the development of platform and an interchange fees are a key element of a system developed by a number of companies (MasterCard, Visa) to make available to consumers as merchants a network service. As we will see, there is no evidence that this is the best system or that there are better ones.
But the question is – how the multilateral interchange fee is formed?
The bank card dispenser covers:
– Insurance and various reimbursements in case of fraud;
– Issue of the card;
– Immediate payment of the merchant even in the case of a debit/credit card;
– Free advance of funds in the case of a deferred credit card;
– Payment guarantee for the merchant;
In return, it sets customer fees for the different types of cards and receives a commission from the merchant’s bank for each transaction using that card as a means of payment. These are the famous multilateral interchange fees.
For the beginning it is necessary to underline that not all payment card platforms work exactly on the same system. There is a difference between four-part and three parts platforms:
– MasterCard or Visa are four part systems: the consumer and his bank, the merchant and his bank.
– Amex, Diners Club are three part systems: the card issuer serves as a bank for the consumer and the merchant.
We will focus in this chapter on the first type of system because it is the one that is currently attracting criticism from the competition authorities and the European Commission.
Fot the European Union the question of the multilateral interchange fees became quite sensitive, as the European Commission has decided to open formal antitrust proceedings against Visa Europe Limited in relation to its multilateral interchange fees (MIF) for cross-border point of sale transactions within the EEA using Visa branded consumer payment cards, and the “Honour-All-Cards-Rule” as it applies to these transactions.
It is necessary to mention, that a stumbling block is a controversial strategy hatched by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers. The Commission has opened an in-depth investigation into:
(i) inter-bank fees in relation to payments made by cardholders from non EEA countries – as opposed to fees for cross border transactions within the EEA that were already prohibited in 2007. Such fees apply for example when a US tourist uses his MasterCard credit card to make a purchase at a merchant in the EEA;
(ii) all rules on ‘cross-border acquiring’ in the MasterCard system that limit the possibility for a merchant to benefit from better conditions offered by banks established elsewhere in the internal market and
(iii) related business rules or practices of MasterCard which amplify the Commission’s competition concerns (like the “honour all cards rule” which obliges a merchant to accept all types of MasterCard cards).
The multilateral interchange fee is not new to competition law.
The NaBanco ruling (1986) in the USA essentially gave the principle of the MIF a clean bill off health. National Bancard Corp. (NaBanco) filed a suit against VISA U.S.A. (VISA), alleging that VISA violated Section 1 of the Sherman Act, 15 U.S.C. § 1, by fixing certain bank credit card interchange rates. NaBanco appealed from this judgment, claiming that the district court erred in applying the rule of reason rather than the per se rule to the facts of the case. Alternatively, NaBanco contends that even under a rule of reason analysis VISA’s conduct was violative of Section 1 of the Sherman Act. In a typical quadrilateral transaction, the consumer issues a bank credit card with the issuing bank, Bank X. Bank-merchat, “Bank Y” concludes a contract with the owner of the store to join the VISA network and accept a VISA card. The cardholder then uses the card to purchase the goods from the merchant who provides the cardholder with the goods and then sends a receipt for the cardholder’s payment (document) to the Bank Y, the bank with which the store owner signed the VISA contract. Bank Y “buys” the paper from the trader in accordance with their contract, but at less than face value. This discounted amount is known as a “merchant discount”.Then, the Bank Y shall “interchange” the paper with bank X so that Bank X can bill the cardholder in accordance with the terms of their contract.
Difficulties in a credit card or “non-cash” transaction arise because each such transaction creates a trace of processing documents. This transaction document, representing an exchange, is transferred between the parties until each of them ultimately takes upon themselves the burden that it has incurred. This case concerns certain fees that are attached when transferring or interchanging, of this paper between the signing bank (merchant) and the card-issuing bank.
Practical issues related to the interchange fees of the bank cards.
Firstly, it is important to look deeper into the problem and to state the basis of the issue. So, the main implement of MIF ”affair” is a payment card. The payment card use has grown dramatically since the introduction of cards in the beginning of the 20th century. Hotels, oil companies, and department stores issued cards associated with charge accounts before world war i. in 1950, Diners Club established the first general purpose charge card that allowed its cardholders to purchase goods and services from many different merchants.
Historically, an interchange fee (in case with MasterCard and Visa) was intended to cover the issuer’s costs when performing operations to pay for goods and services by the credit card holder, which naturally meant granting him a loan. As a result, Interchange was calculated in percent in proportion to the amount of credit extended to the cardholder, including in order to compensate the issuer for the costs associated with attracting additional liquidity to fulfill obligations to the acquirer at his own expense, and to cover the costs associated with providing a concessional (interest-free) the Grace Period.
In 2007, U.S. consumers held more than 694 million credit cards from Visa, MasterCard, American Express, and Discover, and the total value of transactions for which these cards were used exceeded 1.9 trillion USD. If it is possible to imagine, according to these numbers – it is also possible to imagine how the restriction of price competition harms businesses and customers.
For a more illustrative example, author decided to compare how the interchange fee affected the country and competition policies on the concrete examples.
The first country is France – the Competition Authority has been seized of a potential infringement of competition by the Federation of Commerce and Distribution Enterprises (FCD) and the Conseil du Commerce de France (CdCF) ) regarding bank cards of the Grouping of Bank Cards (CB) and other so-called “quadripartite” systems (MasterCard, Visa, …). By a decision of July 7, 2011 (Decision 11-D-11), the competition authority made binding the commitments made by the Group of Bank Cards with implementation them on October 1, 2011. These commitments included:
– A decrease on 36% for the interbank payment commission;
– A decrease on 20% for the interbank withdrawal fee.
Next country is Spain, who has signed an agreement on 2 December 2005 by representatives of the government, trade associations and the institutions involved in the management of payment cards and who has set up a drop of interchange fee on 57.3% between years 2006 and 2010. In Portugal banks went in the direction taken by the European Commission by reducing domestic interchange fees.
In Austria, banks have committed to reviewing their system of interchange fees suggesting the possibility of their reduction. They also committed to increase a competition between Europay Austria and Visa Austria. In Poland, the Competition Authority has prohibited the MasterCard and Visa MIFs on domestically traded goods by a decision of December 2006.
The main reason, why Commission prohibited MasterCard’s MIF it is because it inflates the base on which acquiring banks charge prices to merchants for accepting payment cards, as the MIF accounts for a large part of the final price businesses pay for accepting MasterCard’s payment cards.
MasterCard’s business model includes a mechanism that determines a minimum price merchants must pay for accepting the organisation’s payment cards. This mechanism is based on a complex network of multilaterally agreed inter-bank fees which industry refers to as “interchange fees”. At stake in today’s decision are MasterCard’s intra-EEA fallback interchange fees. MasterCard’s MIF is a charge on each payment at a merchant outlet. This charge ranges between 0.4% of the transaction value increased by €0.05 and 1.05% increased by €0.05 for payments with Maestro debit cards, and between 0.80% and 1.20% for transactions with MasterCard consumer credit cards. The fee is retained by the customer’s bank (the “issuing bank”) and charged to the merchant’s bank (the “acquiring bank”), which then takes this cost element on board in setting its prices to merchants. What is the main problem in MIF story and why Commission presumed that it can ruin a competition between banks in the European Economic Area?
European Commission in their Interim Report I Payment Cards, has mentioned potential barriers to competition in a sphere of card payment services. First of all, they have reffered to the ”structural barriers”. For example, the vertical integration of card payment systems may impede new entrants, in particular non-banks, from competing with the incumbent in one segment of the market.
In some cases, terminal providers must compete with a person who not only owns an internal payment system, but also provides technical and financial services. Next barriers – ”technical barriers” – differences in technical standards in the EU may prevent acquirers, processors and suppliers of terminals operate effectively on a pan-European scale. Apparently, there are significant opportunities for the effective approximation of technical standards in the payment card industry. Most curious barrier is a ”behavioral barrier”- as an example, Commission has mentioned: bilateral clearing agreements between local banks what can make entry to the market more difficult. New participants depend on sponsoring banks, which have little incentive to sponsor potential competitors, or some requirements for membership in the payment system may prevent non-banking organizations from acquiring and acquiring new participants in a cross-border acquisition. Rules that may constitute barriers are requirements for a financial institution and a local institution.
The total amount of interchange fees has risen sharply over the last five years and this increase is not surprising since the success of these platforms has been great and therefore the volume of transactions involved each day is even greater. But it is important to note that over the same period, interchange rates have increased very little.
As a measure aimed at mitigating the position of the EU competition authorities, in 2009 MasterCard Europe operator unilaterally accepted the obligation to calculate the Interchange amount for cross-border transactions within the EU using the “Tourist Test” methodology (or “Test” indifference”). Using such a methodology, it was possible to calculate the size of the Interchange, in which, starting from a certain amount, it becomes more profitable for trader to receive payment not in cash, but through a payment card. As a result, in the framework of the MasterCard, the average Interchange level for cross-border transactions with debit cards was set at 0.2%, and for cross-border transactions with credit cards – 0.3%. This MasterCard solution was approved by the European Commission. In pursuing similar goals, the operator of Visa Europe Limited in 2010 accepted the same obligation to reduce the size of Interchange fee for cross-border transactions with debit cards within the European Economic Area to an average of 0.2%. At the same time, Visa Europe Limited decided to reduce Interchange for intra-country transactions with debit cards in nine European countries (namely Greece, Hungary, Iceland, Ireland, Italy, Malta, Sweden, Luxembourg and the Netherlands) to an average of 0.2%. At the same time, the European Commission in December 2010, took a decision which prohibited to Visa Europe Limited to waive their obligations for 4 years (until 2014 inclusive).
It seems that with a strict and clear regulation in the sphere of an interchange fee there should not be any problems anymore, but it is not a case. It should be noted that direct state regulation, in particular, reduction in the amount of Interchange, also does not always lead to unambiguously positive results. Thus, the decrease in Interchange, in turn, may have a negative impact on the profitability of the card business. With a significant decrease in Interchange, issuers will have to transfer their costs associated with the card business to cardholders in order to increase profitability, which will result in a gradual reduction in the list of services provided to them and an increase in the amount of a one-time annual payment for servicing payment cards. In turn, due to higher tariffs and the cancellation of additional services, the demand for issuers’ services will drop, and due to the network effect, the demand for acquiring services will drop, which will in general lead to a decrease in the popularity of payment cards as an alternative tool for paying for goods and services and moving to others, more acceptable tools, for example, to cash.
Another consequence of the already selective reduction of Interchange in a separate payment system may be the transition of issuers to the issuance of cards of other competing payment card systems where the conditions are more favorable (means that an interchange fee is much higher).
The market of payment cards, as a two-sided market, has a visible asymmetry, which manifests itself in the fact that holders of payment cards are in a better position compared to traders and service providers. If the market itself does not offer a solution to eliminate this imbalance, a moderate and balanced intervention by interested public authorities may be justified. The whole question is in the form and some other important details of this intervention. It is extremely important for the state, having assumed the functions of the regulator of the interbank commission to improve the market, strictly followed the main principle of medicine – “do not harm”. First of all, it is necessary to exclude any possibility that such state regulation would harm the still insufficiently developed European card market and all its participants, including the final consumers of services. In no case should it harm the state’s policy of reducing the share of cash payments, increasing the collection of taxes and increasing the effectiveness of combating money laundering. Unfortunately, such fears seem quite justified, and only practice will show how realistic it will be to avoid these risks in such a difficult but necessary initiative.
The positioning of a payment card as a universal means of carrying out retail non-cash payments, both for paying for a trip in the public transport and for buying expensive goods, is certainly profitable for participants of the payment card market, on the other hand, it limits the consumer’s choice. In the market of non-cash payments, a set of electronic means of payment should be available to the consumer, which will enable him to make the most convenient way and with the chosen level of security to pay, while paying a commission commensurate with the quality of the service provided. Alternative electronic means of payment include, first of all, an order for the transfer of electronic funds and an order for credit transfer from a bank account sent to a credit institution through the “client-bank” system or through the credit organization’s Internet site.
To sum up, author will try to clarify the situation with interchange fee and to give her own vision on this instrument of a bank. First of all, author will try to answer on a question – why do antimonopoly investigations of MasterCard arise in different countries?
Many do not understand what is intercange fee and why it is needed. The scheme of settlements between card transaction participants is rather complicated, and the authorities want to see a clear methodology for determining the commission for interchange. The price is formed on the basis of a cost price. The commission must cover the cost of providing the service, that is, the cost of processing, the reserves to cover the risks associated with card fraud and credit defaults, the cost of funding and at the same time be competitive. At the same time, each country has its own peculiarities of forming an inter-city rate. In general, interchange is an instrument that has been used for more than forty years in different countries. In one form or another, it exists in every country in the world, although there is a misconception that interchange is not applied in the Netherlands or Sweden. It’s just that they have acquirers paying emitters on the basis of bilateral agreements. Now even the European Commission has recognized that interchange fee is necessary, although earlier it insisted on its abolition. Opponents of the commission for interchange fee consider that it lays an unjustified burden on the consumer.
In Europe, the commission for interchange fee existed for forty years, periodically went up and down, but there is no case when after the commission prices fell. For example, Spain not so long time ago reduced it from a maximum of six percent (for some traders) to about 1.2 percent. The tariff adjustment took place gradually, for several years, and did not affect prices at all. There is no correlation between price dynamics and interencourse rates. If only because a decrease in the interchange fee means a very small decrease in the retailer’s costs. So insignificant that it is more expensive for him to change the price tag on the product.
For example, in Australia, the reduction in commission for interchange fee was generally negatively reflected in the card market and had a negative impact on consumers. The cost of card transactions in the trading network may decline due to increased efficiency. But the system can not react quickly to a sharp drop in the inter-city rate. In such cases, card issuers automatically raise tariffs for their customers. So, for a sharp and unjustified decrease in the rate of interchange, the consumer pays. That’s why the best regulator for interchange is competition and the market.
Collision of the Mastercard and VISA cases. The analysis of the jurisprudence.
Since 2002, the European Commission has evaluated the multilateral interchange fees set by payment cards organizations VISA and MasterCard in a number of cases.
Although the EC has authorized this charge, it also recognized that they can be evaluated as an agreement competition law and may therefore be authorized only if outweigh the damage which they create for competition. Knowing the EC’s assessment, the Latvian commercial banks were required to evaluate their agreement and to be able to justify its necessity, however, the case under Competition Council found that banks are unable to provide economic justification for their set fees that often were higher than international payment card organizations have established.
On March 3, 2011, the Competition Council of Latvia has adopted a decision establishing a cartel between 22 latvian commercial banks. As a result of the infringement, banks have established a mutual commissions for accepting payment cards, which in turn set the lowest level for payments made by traders accepting payment cards at their sales outlets. This has distorted competition and damaged both merchants who accept card payments and consumers. The prohibited deal concerned the commissions paid by banks for card settlement as well as ATMs. Banks have been fined a total of LVL 5 495 462.19 in lats (in EURO = 7 819 338.24). In order to ensure payment of cards, there is a card payment system in Latvia, the expenses of which are mainly covered by payments from traders accepting payment cards at their selling markets. During the investigation, the Competition Council of Latvia found that the size of the merchant payment was directly dependent on the amount of interbank payments. Thus, in 2009, the amount of interbank payment reached 75% of the merchant payment in the case of debit cards and 100% in the case of credit cards. Thus, a bank agreement on a single interbank fee without setting this payment in line with the costs of a particular bank distorted competition and did not force all banks to fight for a new customer-dealer by applying lower commission fees.
In the decision, the Commission concludes that the interbank payment established by the Latvian banks and, accordingly, the payment applied to the merchants has not been economically justified and has not been adjusted in the light of changes in market conditions and a decrease in bank expenditures. In order to prevent the banking arrangements negative effects on competition, an increase in the volume of card payments and sequentially banking income, the payment was a decrease. However, all agreed period of time in excess of eight years, the payment was constant, thereby preventing the benefits of scale to put the merchants. In turn, if there were no local bank agreements or separate bilateral agreements, banks would have to apply the terms and conditions of interbank payment applied by international payment card organizations VISA and MasterCard, which in general had not been higher, while at certain times they were significantly lower than those set by Latvian banks. Similarly, the agreement led to the distortion of competition that would provide consumers with lower commission fees for cash withdrawals or account status viewing the ATMs of other banks. This circumstance was particularly significant at the beginning of the agreement (since 2002), when non-cash settlements were less prevalent, and there were fewer bilateral banking agreements, which in many cases allow for the provision of certain services cheaply or even for free.
One of the most famous cases – Zuchner case, demonstrates ”the compelling difficulties which may arise in terms of providing evidence of anticompetitive behaviors by banks.” Mr Züchner, the plaintiff in the main action, has an account with the Bayerische Vereinsbank AG, the defendant in the main action, at Rosenheim in the Federal Republic of Germany. On 17 July 1979 he drew a cheque on the defendant bank in the amount of DM 10000 in favour of a payee resident in Italy. For this a “service charge” of DM 15, representing 0.15% of the sum transferred, was debited to his account by the defendant. Mr Züchner sued the Bayerische Vereinsbank AG before the Amtsgericht Rosenheim asked for repayment of the charge. He maintained, inter alia, that the imposition of the “service charge” was incompatible with Article 67 of the EEC Treaty because it introduces discrimination between transfers of capital within the country and transfers abroad, and with the competition rules in the Treaty because it is a practice followed by all the banks, or most of them, both in Germany and in the other Community countries and is liable to affect trade between Member States. Here, the ECJ was asked to make an analysis of a possible concerted practice within the meaning of Article 101 of the Treaty.”Parallel conduct in the debiting of a uniform bank charge on transfers by banks from one Member State to another of sums from their customerss’funds amounts to a concerted practice prohibited by Article 81(1) of the Treaty if it is established by the national court that such parallel conduct exhibits the features of the coordination and cooperation characteristic of such a practice and if that practice is capable of significatnly affecting conditions of competition in the market for the services connected with such transfers.”
Another case, CRAM and Rheinzink, displayed the situation, where the price charged for the product in question was higher in both France abd Germany than in certain other Member States, so the Commission claimed that the parties concerned had engaged in collusion by terminating supplies to the same customer who was engaging in parallel trading from Belgium to Germany. Finally, the ECJ resumed that: “The Commissions reasoning is based on the supposition that the facts established cannot be explained other than by concerted action by the two undertakings. Faced with such an argument, it is sufficient for the applicants to prove circumstances which cast the facts established by the Commission in a different light and which thus allow another explanation of the facts to be substituted for the one adopted by the contested decision. The applicants have in fact proved the existence of such circumstances…It follows that the Commission has not produced sufficiently precise and coherent proof to justify the view that the parallel behaviour of the two undertakings in question was the result of the concerted action between them”.
In the next case an infringment consisted of the decision of the Groupement des Cartes Bancaires CB – the Groupement has around 150 members and is controlled by the biggest French banks, all represented on the Groupement’s board of directors: Crédit Agricole, Crédit Lyonnais, Crédit Mutuel, Crédit Industriel et Commerciel, Société Générale, Crédit du Nord, BNP-Paribas, Natexis — Banques Populaires, the Caisses d’Epargne, the Post Office bank and Crédit Commerciel de France, introduced a series of pricing measures aimed at and which, as a result, endangers competition in the interests of large French banks controlled by Groupement. As a result of the increase in card issuance costs for new entrants, the measures taken by Groupement have resulted in France maintaining the price of cards in a higher level than would be in a free competition and limiting the number of cards offered at competitive prices. In its decision, the Commission carefully scrutinizes the content of the money measure and concludes that these measures and the effects of these measures restrict competition. At the time of the preparation, the intention expressed by the big bank managers and the Groupement is additional evidence (obtained on the inspections of 20 and 21 May 2003), which reinforces this conclusion.
The Commission examined the prices applied by the new participants and leading banks and the number of cards issued. The results confirmed that the new participants affected by the measures were not able to issue the cards at lower prices than initially foreseen (because they did not allow it), and they did not make as many cards as they intended before the measures were taken. The results confirm that leading participants should not cut their prices in response to the competitive pressures created by the new participants. In its decision, the Commission explicitly objects to the existence of card issuers’ parasites at the expense of purchasers. The decision shows that MERFA (Mécanisme Régulateur de la Fonction Acquéreur, Acquiring Mechanism of the Buyer Function) does not encourage purchasing, contrary to what Groupement claims. The acquisition market is practically entirely in the hands of large leading banks, and there are very high penetration barriers. Groupement’s assertion that the conditions of Article 81 (3) of the EC Treaty are met are not supported by any evidence. There is no increase in efficiency or advantage for consumers, but rather the opposite. Groupement arguments (in relation to the need for measures) that there is no mechanism other than MERFA in order to balance service and purchase conflicts with other Groupement claims that the French inter-bank commissions in addition to the reimbursement service have a mechanism that balances the acquisition and issuance.
All these cases focusing that card networks restricting to prohibit internal competition by unreasonably adopting fees that control card prices at synthetically high levels for consumers. In the last case, the large French banks used their privileged posture within the Groupement to agree fee measures that would actually apply to those participants that wished to compete with them on price.
Summing up, it could be said that mass criticism, as well as lawsuits and antitrust proceedings, addressed to MasterCard and VISA activities in the last decade by various public and industrial associations, antimonopoly authorities of many countries, demonstrate that the efficiency of the described model of the interchange fee and the arguments of payment systems are quite controversial. In authors’ opinon, rules of payment systems boils down to the fact that the rules adopted in payment systems serve to non-specified goals of increasing efficiency, but for creating marketing advantages of VISA and MasterCard, and in the end are not a source of development of non-cash payments, but, on the contrary, their brakes. It is obvious, that criticized are exaggerated and constantly growing commissions of the issuer, intended on assurances of representatives of payment systems to ensure the security of transactions. According to experts’, only a small part of the issuer’s commission collected by the systems is aimed on a securing transactions, but the greater part goes to marketing programs, to promote the products of payment systems and payments to shareholders and management systems.
One of the biggest arguments against the rules and VISA and Mastercard fees model are examples of successful operation of payment systems, without commissions of the issuer. Such systems exist in Canada, a number of European countries, under the same rules VISA and MasterCard are forced to work in Australia and Mexico. At the same time in none of these countries there are no crises of payment card systems or retail non-cash payments.
STATE AID IN THE BANKING SECTOR – IS IT A REAL LIFEBUOY?
When we are speaking about the State Aid, automatically, we are asking lots of questions related to it. For example, what are the conditions that ought to be met for state aid? Is is allowed to use a state aid for banks? How a state aid can exist in same time with a competition law requirements? What is clear, that an entity which receives a state aid gains an asset over its competitors. Therefore, the Treaty generally prohibits State aid unless it is justified by reasons of general economic development. To ensure that this constraint is respected and exemptions are applied equally across the European Union, the European Commission is in charge of ensuring that State aid complies with EU rules.
But why is it so important, to provide special EU state aid rules? The answer is very simple and logical – while the liquidation of small banks may not affect the European financial system, their entry into the market may still have consequences in the regions where such banks are most active. Thus, beyond the European system for resolving banking decisions, Member States must decide whether they believe that the bank’s exit can have a significant impact on the regional economy, for example, on financing small and medium-sized enterprises in the regional economy and whether they want to use national means to mitigate these effects.
In the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis, the European Commission has provided detailed guidance on the criteria for the compatibility of State aid with the internal market pursuant to Article 107(3)(b) of the Treaty on the Functioning of the European Union for the financial sector during the financial crisis.
So, the main reason of ”allowing” the State Aid – was a prevention of competition on a market during the crisis time. The focus of the European Commission was on using ‘State aid’ as the lever and the mechanism to resolve matters as opposed to using other tools or elements of EU law and policy. It is, curious that so much attention was paid to the State aid aspects when trying to resolve the banking crisis throughout the EU — the State aid rules had to be (and quite rightly) observed but they were of ten seen (or portrayed implicitly at least) as part of the solution to the EU banking crisis when they could not have been. There could have been greater use of prudential, regulatory and other instruments. Secondly, it is now interesting and fascinating to have such a rich harvest of State aid cases relating to the crises: and such a little-used provision as Article 107(3)(b) of the TFEU.
But in order, the general provisions concerning state aid in the primary law of European Union are placed in Article 107(1) of the Treaty on the Functioning of the European Union. It is stated, that “Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.” From this provision, we cannot clearly get an answer, is it good, or is it bad to get a state aid, and how it should look like. The reference to the ”threat” to competition in Article 107 is obviously necessary since State aid must be notified to the Commission in advance. State aid remains a politically important instrument for governments to intervene in their economies.
In order to assess whether State aid is permissible, it is necessary to assess:
•the purpose of the aid;
•the compliance of the State aid instrument with the objective and proportionality;
•the procedure for the coordination and awarding of the State Aid.
In order to decide on the admissibility of State aid, a balance-of-interest test must be carried out, which evaluates:
•the positive effects of state aid – promotion of a well-defined goal;
•the negative effects of State aid, that is, the damage caused to trade and competition;
•the necessity and proportionality of support (amount and intensity) for the achievement of a specific objective.
However, more often State aid is used to further specific policy objectives. For example, the overarching objective of State aid control during the financial crisis was to ensure the stability of the overall financial system and prevent contagion.
So, does it looks like a lifebuoy? Generally, the main idea is, that the State aid may increase economic welfare in two main ways: by improving efficiency when the market fails to deliver an optimal economic outcome; and (depending on social and political preferences) by improving equity, when the market outcome is characterised by significant socio-economic inequality.
We could assume that the competition in banking should produce equal effects as competition in any other sector; that is to improve efficiency and higher innovation, thus leading to a larger variety of products, lower prices, vast access to finance and exceptional service. Nonetheless, a few features of the financial sector make it depart from the textbook competition standards. These combines high barriers to entry (also as a result of regulation), unbalanced information in corporate communication, immense switching costs, network effects and elements of non-price competition that can be used as critical variables and sources of rents. By all means, many alternative sectors of the economy share these aspects to a greater or lesser range.
Now it is clear, that there is some part of relativity while using this instrument, but still lots of questions concerning the nature of the State Aid in the banking sector. If every entity in the financial sector that is in difficulty or operates under unfavorable market conditions would receive aid from the state, will these entities be weakened to a balanced and prudent investment strategy? Does the privileged one of the institutions, relative to other financial aid operating on the financial market, distort competition and influence profits?In the next chapter, author will try to give an answer on this section in details.
Matter of distortion of competition law in the case of State Aid.
The European Commission is quite effective in promoting adequate and undistorted competition in financial services. It uses competition enforcement, state aid and merger control to address anti-competitive conduct and to provide efficiencies and free and identical access to financial services.
Although the financial crisis essentially challenged models of regulation and oversight in the financial sector, in the European Union the application of competition guidelines, including State aid rules, were compelling for recovery.
It is important to mention that, since the financial crisis hit Europe the European Commission has determined the way in which Member States could support their national financial institutions.
Specific conditions for granting support covered, among other things:
• no discrimination in access to planned support measures,
• limiting the obligations of member states for such time that guarantees that support will be provided as long as it is necessary to overcome problems in financial sector,
• transparent definition of support by the state and limiting its scope to what is necessary in coping with a strong crisis in the financial markets,
• adequate contribution of the private sector, based on proper remuneration in order to introduce general support projects.
State interventions in the financial sector were different from traditional aid for rescuing and restructuring financial institutions in a difficult economic situation. The fundamental difference is that the mechanism for granting support was directed to the entire financial sector, not individual banks. But as always, statistics speaks for itself – by 2009, the amount of approved anti-crisis measures for the financial sector was to amount about one-third of the GDP of EU countries. The amount included both interventions, though approved, not taken, as well as the maximum value of ”guarantee umbrellas”, rescue and restructuring packages. ”Between 1 October 2008 and 1 October 2010, the Commission took more than 200 decisions on State aid measures for the financial sector aiming to remedy a serious disturbance in Member States’ economies. More than 40 schemes were authorised, amended or prolonged and individual decisions concerned more than 40 financial institutions.” By September 2011, the amount of emergency support granted exceeded one-third of the European Union’s GDP.
In 2008-2009, the European Commission decided to publish the regulatory framework for state aid for the financial sector. These were special provisions in the area of ??aid and they allowed member states to provide public support to the banking system during the financial crisis for the sake of financial stability, without unnecessary distortion of competition rules in the European Union’s single market. Accurate guidelines regarding the criteria for the compatibility of support provided by Member States to financial institutions with the provisions of the Treaty on the Functioning of the European Union initially covered four communications, i.e.:
• a bank communication entitled Application of the state aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis;
• recapitalization message titled Recapitalization of financial institutions in the current financial crisis: limitation of aid to the necessary minimum and mechanisms to prevent undue distortion of competition;
• Communication on impaired assets pt. Communication on dealing with impaired assets in the Community banking sector;
• a restructuring message on Communication on the restoration of viability and the assessment of restructuring measures applied in the financial sector in the current crisis in accordance with the State aid rules.
The first three communications contain pre-conditions for compliance with the internal market of the most important types of assistance provided by the Member States, i.e. guarantees for liabilities, forms of recapitalization and means for saving assets. On the other hand, the Restructuring Communication sets out in detail the description of the restructuring plan (or recovery plan) in the specific context of the assistance of the crisis-related state to banks. In December 2010, the Commission adopted the fifth Communication on the prolongation – Commission communication on the application, from 1 January 2011, of the State aid rules to support measures for banks in the context of the financial crisis. In the context of initially time-limited regulations, the period of application of the Restructuring Communication, the last of the four guidelines with a given expiry date, until 31 December 2011 was extended. However, the tension on the public debt instruments in 2011 increased, causing the banking sector in the European Union to be under pressure again, caused the prolongation of other emergency provisions in force during the crisis. It found its expression in the so-called package for banking.
State aid by its definition can have both favorable and unfavorable consequences which should never be depreciated. Although, State aid is a quite powerful mechanism to immediately address a definite market failure, the measure remains a distortion of competition capable of being damaging to the economy. Taking this aspect into account, the instrument of State aid always required a high level of control and attention in its application.
In the conditions of building the internal market of the European Union, the provision of the aid by the state member of the EU to any enterprise is incompatible with the principle of free competition, as enterprises from different states are in an unequal position. The founding agreements of the EU contain rules relating to the provision of State Aid regulation which is one of the main features of competition law in the EU. According to the Article 107 of the TFEU, any aid provided by a Member State violates competition or threatens to distort it.
But why an issue of distortion is so tricky? How it is possible to reveal the detriment from it? The conception of distortion of competition and effects on trade in the broad prohibition of State aid has a highly economic approach, suggesting that an economic analysis should be requested in order to resolve whether aid would be a violation of Art.107(1) of TFEU. Still case law broadly accepted the presumption that State aid would result in distortions of competition and effects on trade, ”leaving little room for economics in the determination of whether State aid would violate Article 107(l), because the exceptions in Article 107(2) and (3) TFEU are exhaustively spelt out, and the necessary compatibility analysis identifed in a detailed manner in various European Commission Guidelines, economics also did not play a signifcant role in the assessment of the compatibility of the aid”.
The Commission, by themselves, has defined a state aid ”as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities”. But more brightly can speak the statistical data – since the beginning of the financial crisis, 112 banks in the EU, representing around 30% of the EU banking system by assets, have received State aid.
So, the State Aid is looking like an exemption case, somehow. Does the State Aid fulfill some exceptional goals of the TFEU? As we know, there are two types of automatic exemptions. The first one is a State Aid that has a social aspect, which is granted to individual consumer, and which is provided without discrimination regarding the origin of the product; and the second, ”state aids that are due to exceptional circumstances requiring solidarity, i.e., aids to compensate for the damage caused by national disasters or exceptional occurrences”. Another aids possibly to exempt. Amongst these are aids to contribute into the economic development of strongly depressed areas, i.e., areas where the standard of living is abnormally low or where there is serious unemployment. As well embedded aids to facilitate the execution of significant projects of common European interest. About this occurrence, in details, will be the next subchapter.
State Aid during the financial crisis 2008 and its impact on the competition law.
Political scientists and polytologists have observed that the European Commission’s policy on State aid during the financial crisis has evolved from a very indifferent approach, motivated by the high economic and political tension of the early days of the crisis and particularly soon after the crash of Lehmann Brothers, towards a stricter approach as the financial and economic context was becoming more stable.
Just as a banking crisis pierced, the government has to evaluate two risks. One of them is the moral hazard risk that will show up in the future when a bank is bailed out and the second one is the immediate risk of an implosion of the banking system when a bail-in is executed. Authorities that have the capacity to do so will nearly anytime choose the bailout option when systemic banks are engaged in order to get away from instant costs to the economy, and it is called – a deep economic depression. Just as sovereign governments have to select between two evils in crisis, they will select an option to avoid the crisis. The Commission’s method to increase the toughness of State aid control constantly has been based on the publication of soft law instruments stating how it intended to approach the compatibility of aid for banks in verious periods of the crisis. After the crisis, the Competition Commission excuted State aid rules to many national measures aiding financial institutions, assuring that the level playing field between aid recipients and their competitors is supported – State aid control has compelled the financial sector both to restructure and to share the burden of its salvatio with taxpayers State aid rules also range the amount of public funding of unsuccessful financial institutions, demanding shareholders and hybrid capital holders to participate in restructuring costs.
The basic economic background for providing the State Aid to financial institutions in time of the crisis has been to get away fro the crash of banks generating grave problems for the general economy. Simultaneously, any such maintenance in the European Union should be given in the context of state aid policy.
The 2017 Scoreboard shows State aid to financial institutions in the years 2008-2016, by aid instrument. The data include both the ultimate amounts of aid that EU Member States were allowed to grant (State aid approved) and the amounts of aid indeed implemented (State aid used). Data shows that the level of State aid to the financial sector, both approved and used, in 2016 was the lowest since the beginning of the crisis. No recapitalisation aid was used for any bank for the first time since the beginning of the financial crisis. Also, data shows that the European banking sector is relying less and less on government guarantees for liquidity support, as it is able to find the crucial liquidity on the market.
As we already understood, the most important role in the State Aid plays the Commission, because it is only Commission that can rule whether the aid is compatible or not. In the past three years, the Commission had to handle a huge amount of cases. In the immense majority of cases, the Commission had to keep market stability approved notifications of Member States on new grant schemes, based on a provisional basis, categorising the measures in question as a „rescue” aid and requiring the member state to regress to the Commission – usually within six months – with a plan for the restructuring of the bank, aimed at ensuring its long-term growth without further aid. On the basis of the restructuring plan, by consultation with the Member State in question and by investigating the vitality of bank the Commission could issue a concluding decision approving the aid in question.
The measuers adopted by Member States are:
• Equity capital support (Making available new Tier 1 capital for banks and building societies to strengthen their balance sheets and permit them to restructure their finances, while maintaining their support for the economy as a whole.);
• Debt support (Providing a State guarantee of short and medium term debt insurance designed to reopen the market for short and medium term wholesale funding, thus addressing the problems of banks which are fundamentally sound but which, due to the current financial crisis, are unable to refinance their wholesale funding as it matures.)
participation in debt issues;
underwriting of subordinated debt;
guarantee of bank deposits;
overall guarantee of bank liabilities;
guarantees for interbank lending and bank bonds.
• Short-term liquidity support.( The provision of short term liquidity, mainly by extending the collateral accepted.).
In conclusion, it is worth pointing out that, as in any other sector, financial institutions may find themselves in a difficult situation due to excessive risk, bad management, defective supervision and as a result of fraud. In such situations, public support may lead to the distortion of competition between banks and the common market’s economic system. On the other hand, intervention policy allows us to solve such serious problems that we have faced since autumn 2008, when there was a serious shortage in bank financing in the European financial system. The financial crisis created the need to carry out far-reaching state interventions, which differ from traditional aid for rescuing and restructuring financial institutions in a difficult economic situation. The policy on granting public aid has become an indispensable element of the market game in the financial sector. For the first time, the provisions of the European treaty have been used on such a large scale, which allow to provide help. Thanks to these provisions special temporary measures were introduced in the form of state aid, recapitalization, means for saving assets, means of restructuring banks showing serious financial difficulties in unprecedented amounts.
Analysis of the case law on State Aid.
An ambigue conclusion can come in the mind after the short analysis of the case law on the State Aid in European Union – the Commission’s philosophy: the state can become the owner of the banks but … temporarily.
Since the beginning of October 2008, the European Commission has made a number of decisions on aid to the banking sector in most EU Member States, in particular recapitalizations and guarantees. Belgium has attempted to justify that some mechanisms do not constitute State aid, but a normal investor behavior in a market economy. However, the Commission considered in each case notified that the measures were State aid, but complied with the 2004 Guidelines on rescue and restructuring aid for firms in difficulty or compatible with the Internal Market within the meaning of Article 87 (3) (b) of the EC Treaty (aid to remedy a serious disturbance in the economy of a Member State). It can be seen from the outset that if the State can become an owner in these circumstances, the European Commission has duly ensured that this does not take on the appearance of structural participation. Moreover, if the State chooses recapitalization, “Depending on the instrument chosen (eg shares, guarantees, equity loans, etc.), the Member State concerned must, in principle, to allocate the rights whose value corresponds to its contribution to the recapitalization. The issue price of the new shares must be fixed on the basis of a market price valuation “. To make it even clearer that the government is not taking advantage of it to make a good deal, the Commission said that when buying or exchanging assets, the valuation of the assets must re-evaluate the risks, underlining, but without undue discrimination against the seller.
During the height of the financial crisis in 2008, the Dutch bank ING received an emergency investment of €10 billion from the Dutch Government. The confusion in the financial markets which was triggered by the crisis called for the intervention by European governments in order to limit the detrimental effects of the collapse. State aid to financial institutions was crucial as a means of building up the confidence in the financial sector with the aim of avoiding a fundamental crisis. In the period between 1 October 2008 and 1 October 2011, the Commission approved aid to the financial sector for an long-term amount of € 4.5 trillion (36.7% of EU GDP).
The supervision of these aids by the Commission ensured these measures did not destroy the level playing field between aid recipients and their competitors: banks who profit from government support have to pay back the aid received. Without State aid rules, we would have seen a subsidy race and cruel damage to healthier companies.
In addition, a cash flow swap was applied, as a second aid measure, to the impaired assets of a portfolio of securities backed by residential mortgages in the United States, the value of which had declined momentous at the time of the financial crisis. On 12 May 2009, the Dutch Government notified the Commission of the proposed aid package. The Dutch Government subsequently changed the terms under which the aid was to be repaid by ING. On 18 November 2009, the Commission cleared the injection of €10 billion and the cash flow swap, but found that the terms of repayment constituted additional aid of €2 billion. Following an agreement between the European Commission and The Netherlands, the Commission has approved an amended restructuring plan of the Dutch-based financial institution ING under EU state aid rules. ING agreed to a fixed repayment schedule and remodelled its proposals to ensure that a new competitive force emerges in the Dutch retail market. At the same time the addendum of certain deadlines for the divestment of assets is compensated by longer behavioural coercion on the bank. This unique plan addresses the Commission’s concerns. Commission Vice President in charge of competition policy Joaquín Almunia said: “Our agreement with the Dutch authorities preserves the balance of the original plan. The issues created by all the state aid received by ING are adequately addressed by the amended plan. In the next three years, ING will repay to the Dutch state all the state support it received, including a premium. Incentives have also been put in place to ensure ING succeeds in creating a new competitive force, NN Bank, in the Dutch retail market. ”
In the Amro Group v Commission, the General Court (GC) scrutinized the Commission’s approach in its try to strike the correct tension between competition law and the commitment for financial aid, the GC has indicated that the context in which an administrative decision is adopted may diminish the burden of motivation imposed on an institution when it deals with undertakings as interested parties, especially when the alleged failure to provide sufficient motivation involves a relatively secondary matter. In the context of the judicial review of a State aid Decision adopted by the European Commission in the recapitalisation of ABN Amro by the Dutch State, the challengers of the Decision argued that the Commission had breached its duty of good administration and, more precisely, its obligation to provide reasons for the rejection of certain commitments associated to the restructuring of the bank.
In April 2012, two Danish banks – Vestjysk Bank and Aarhus Lokalbank merged to become unique Vestjysk Bank A/S which is mainly active in the Danish region of western Jutland. The Commission impermanently approved up to DKK 8,941 million (€1.2 billion) state aid for Vestjysk Bank A/S. In practice, the bank received public capital injections of DKK 341 million (€46 million) as well as guarantees of DKK 6.8 billion (€914 million). On 12 June 2017, Denmark registered an irrevocable undertaking with a conglomerate of Danish long-term private investors on the sale of the Danish State’s 81.47% share in Vestjysk for an absolute consideration of generally DKK 123 million (€16.5 million). This process was closed on 18 July 2017. The private shareholders of the bank have the chance to sell their shares to the consortium under the identical conditions as offered to the State. The consortium will also guarantee the achievement of a share issue resulting in DKK 745 million (€100 million) in new equity. Following the refinancing of its subordinated capital base, the bank will compensate the approximately DKK 287.6 million (€38.7 million) in remaining outstanding state-funded hybrid capital. Commissioner Margrethe Vestager, in charge of competition, mentioned: “Vestjysk Bank will continue its in-depth restructuring to ensure its long-term viability, back in private hands and without any additional public support. The plan enables the bank to continue to serve its many retail, small business and farming customers while minimising potential distortions to competition.”
Monte dei Paschi di Siena is the fourth biggest Italian bank and at the end of 2016 had a market share of 7.1% at national level. On 23 December 2016, MPS submitted a demand for liquidity support. The Commission temporarily approved the aid (i.e. State guarantees for bonds issued by the bank), conditional upon, between other things, the submission of a restructuring plan. With the presently submitted restructuring plan, also the liquidity aid has now been authorised on a definitive bas. The “Garanzia Cartolarizzazione Sofferenze” (GACS) is an Italian state guarantee scheme arrangeed to assist Italian banks in securitising and moving non-performing loans off their balance sheets. The Commission has approved state aid in the amount of €5.4 billion for a precautionary recapitalisation of Monte dei Paschi di Siena (MPS), which follows the agreement in basis reached on 1 June 2017 between Commissioner Vestager and Pier Carlo Padoan who was an Italy’s Minister of Economy and Finance, on the restructuring plan of MPS. The two conditions for this agreement are at the moment both satisfed, specifically the European Central Bank, in its supervisory capacity, has accepted that MPS is solvent and meets capital requirements, and Italy has obtained a formal commitment from private investors to purchase the bank’s non-performing loan portfolio. The plan empowers MPS to meet achievable capital needs that would emerge if economic conditions were to aggravate (as a precaution). In order to approve the state injection, MPS’s shareholders and junior creditors have contributed €4.3 billion to limit the use of taxpayer money as required by EU state aid rules. Independently, eligible retail bondholders can look for a compensation from the bank for having been mis-sold junior bonds. Furthermore, the bank will exprience in-depth restructuring to ensure its forthcoming viability and to ensure the Italian State will be sufficiently remunerated for its investment.
At the end of 2008, AS Parex banka was the second largest bank in Latvia with a total assets value of 3.4 billion lats (4.9 billion euros). It was active in the market of the Commonwealth of Independent States (“CIS”), which is an association of the former USSR states, which was hit hard by the financial crisis. As a result, confidence in Parex banka was eroded and panic began in 2008, with a 36% drop in deposits compared with the end of 2007. In November 2008, Latvia announced a rescue package in favor of Parex. In November 2008, the Commission temporarily approved the measures based on Latvia’s commitment to submit a restructuring plan. In May 2009, the Commission approved amendments to one of the measures. In July 2010, Latvia announced the Parex restructuring plan approved by the Commission in September 2010. The plan was to split into Parex’s “right bank”, a newly-created bank, named as AS Citadele banka, which took over all core business assets and some non-core assets, and a “bad bank” (Parex, later renamed Reverta), which retained the remaining non-operating and non-performing assets. In August 2012, the Commission approved amendments to the restructuring plan.
In April 2014, the Commission launched an in-depth investigation to assess the compliance of such additional unpaid support measure granted by Latvia to AS Reverta and AS Citadele banka with EU State aid rules, in addition to those approved in the framework of the Bank Restructuring for purposes of a subordinated loan granted to Parex with an original repayment of 7 years, exceeding the 5-year maximum repayment, and an additional 18-month repayment; as well as Parex banka and subsequently reverted to the bank Reverta, which is in excess of the threshold approved by the Commission. The Commission also investigated possible abuses of previously approved aid, as Latvia failed to fulfill its obligation to separate Citadele Bank’s private equity management within the agreed deadlines. On the basis of additional information provided by Latvia, the Commission’s investigation showed in particular that the measures regarding the repayment of the subordinated loan were limited to the minimum necessary to allow Citadele Bank to meet more stringent solvency requirements. This, in turn, was a prerequisite for fulfilling Latvia’s commitment to sell the bank, as well as being a necessary step to maintain the stability of the Latvian banking system. The Commission’s investigation also found that liquidity support was limited to the minimum necessary to ensure structured closure of Parex banka. Additional liquidity support is in line with the new requirements for burden sharing introduced by the 2013 Banking Statement as the equity of Parex banka’s former shareholders has been fully written off and Latvia is committed to ensuring that subordinated debt holders do not benefit from additional support. As regards the commitment to separate the private equity business, the Commission considers that the additional commitments offered by Latvia, including a new deadline for separating the private equity business business, are sufficient and adequate to avoid distortions of competition. Consequently, the Commission concluded that all measures assessed were in compliance with State aid rules and changed the timing of the business divestiture of Citadele banka’s private equity management in line with the new commitments entered into by Latvia.
One of the most loud cases of the last decade in the field of State Aid was the privatization of the Bank Burgenland. In 2005, the government of the Austrian federal state Burgenland put up for sale Bank Burgenland. The tender was assigned by the investment bank HSBC Trinkaus ; Burkhardt KGaA in cooperation with HSBC PLC. At the final stage of the competition, two applications were submitted: the offer of the Austrian company Grove amounted to 100.3 million euros and the Austrian-Ukrainian consortium Slav AG estimated the purchase to 155 million euros. HSBC recommended the sale of the company to Growe with additional criteria: reliability of payment, continuation work of Bank Burgenland, no need for warranty measures, capital increase and transaction security. After reviewing the written recommendations of HSBC, the government of Burgenland accepted the proposal of Growe, despite the fact that the amount claimed by Slav AG was significantly higher. The Slav AG consortium filed a complaint to the Commission, arguing that Austria violated the rules of state aid. In the applicant’s opinion, the tender procedure was not fair and transparent, and also discriminative for the Slav AG, which led to the sale of the bank, at a price lower than it was proposed by a consortium. After two years, the Commission decided on the state aid provided by Austria in the case of privatization of the Bank of Burgenland. The Commission confirmed its position which was defined in the earlier decisions, pointing out that in the case of a tender, the state should accept proposals for the sale of the enterprise of the buyer who indicated the highest price. The EU Court rejected the claim of Austria, the federal state of Burgenland and Growe, confirming that in case of sale of an enterprise through a tender, the market price should correspond to the highest proposed price, provided that such a proposal must, firstly, be binding and reliable, and secondly, take into account other economic factors, such as off-balance sheet risks. Not finding in the decision of the Commission significant errors the EU Court also concluded on the qualification of actions the government of the federal state of Burgenland as the provision of state aid. The EU Court also ordered Austria to pay the difference between the price offered by the Slav AG consortium and the price actually paid by Growe, that is, 54.7 million euros, reduced by 2.1 million euros.
To resume the above, we can say the following – the founding treaties of the European Union since the very creation of competition law regulation provided for control over the provision of state aid as one of the directions of the competition policy. The EU Court in its practice takes a very careful approach to the definition of the state aid. The practice of the EU Court and the Commission shows that state aid is subject to a wide interpretation and can take various forms: as a direct form in the form of subsidies or loans, and veiled in the form of tax incentives or additional conditions for privatization and it should be pointed out that justified assistance, granted in extraordinary situations, allows to gain more benefits than it brings losses.
MERGER IN THE BANKING SECTOR – AN AMBIGUOUS SOLUTION OR AN ISSUE
The growth of competition in banking sector has been particularly significant in recent years. This applies both to competition between banks and to the competition of banks with non-banks (insurance companies, investment funds, etc.). Competition is facilitated by both the integration of different markets and the processes of globalization of the market. Most experts acknowledge that the introduction of the euro has contributed and will continue to promote bank merger processes still some more time.
It should be noted that in banking, as in any other industry, free competition inevitably causes concentration. Some banks are absorbed by more powerful competitors, others formally retaining independence, in fact fall under the power of stronger competitors. There is a merger of banks. The number of banks is decreasing, but at the same time their size is increasing, the volume of operations is increasing. In each country, a few of the largest banks are allocated, in the accounts of which huge sums of free funds are sought, seeking a lucrative application.
According to the magazine The Economist, the main tendence is that “There is little taboo in the dormant European banking industry: as never before, banks merge with each other, with insurance companies, fund managers and other companies.” As a result, experts’ conclusions about the merger of commercial banks, leading in the market, are ambiguous. There are arguments for both “for” and “against” the merger. Many agree that it is always a dilemma for a banking regulator. On the one hand, the need to form an efficient and competitive financial sector of the economy, and on the other hand, the fear of creating obstacles to growth through the consolidation of banks, especially if there are doubts that the banking sector will not rise and strengthen due to the natural growth of each of the banks.
Theoretically, the main motivating reasons for the merger are the opportunity to reduce costs, consolidate the branch network and other resources, gain benefits from the activities of a larger organization and increase market share and revenues. Large banks also have more opportunities for international expansion. Typically, the merger is associated with the main benefit – a reduction in costs. In most of the merger cases this goal is achieved. Bank shareholders demand better returns, especially when comparing European and US banks’ spending and profit figures. Experts have estimated that spending in France, Germany and Italy is on average about 70% of revenue, while US banks account for an average of 58% of revenue. Expenditure reductions are achieved both in optimizing the governance structure and sales channels (reducing the number of branches and employees).
Bank merger theoretically allows to combine several significant items of expenditure, such as maintaining and developing bank technology. There are, in essence, two benefits: both the decline in spending and the opportunity to invest more in information technology due to higher revenue streams. In the second case, of course, there will be an increase in the share of information technology costs in total expenditure, but nowadays it is difficult to overestimate the need and impact of technologies in the banking sector. Developed technologies simultaneously provide an opportunity to develop alternative banking customer service models that allow reducing other items of expenditure, such as affiliate maintenance costs.
The merger is, of course, always intended to benefit. This is also confirmed by many successful merger cases. However, merger processes are often hampered by a number of internal or external factors. The most significant of these are:
– limitations in the legislation;
– artificial privileges;
– destructive management.
For understand the sense of those factors, author will demonstrate some concrete examples: the merger process is sometimes hampered by the particular position of individual banks in the overall banking market, which is determined by some artificially created privileges. For example, competition in the banking sector in France distorts state-owned privileges for savings banks and postal services. Thanks to special tax incentives and other benefits provided by legislation, it is possible to offer highly profitable savings account provisions. Such privileged market players are less affected by the competition, and thus one of the factors contributing to the merger – competition – disappears or diminishes. The government does not seek to reduce or eliminate the privileges that enable it to borrow from these market participants with more favorable terms. So that a merger can start and run smoothly, it is often not enough for shareholders to decide. A significant and positive contribution from the management of the merger is required. The merger, which leads to a reduction in the total number of employees, has the most severe impact on the highest and the average management level. When banks merge, one of the key parameters of the regulator’s assessment is the level of competition or the extent of the merger’s influence on competition in the financial sector. Merger of banks usually increases the capacity of a new bank and can lead to higher costs and a decline in the quality of services provided. In market terminology, this is called abuse of market power, or abuse of market opportunities.
For understand a complicate nature of a merger and acquisition it is necessary to describe shortly the procedure for controlling mergers and acquisitions.
It is carried out in a several stages. Before formally submitting a transaction to the Commission, it is discussed informally by the participants and the General Directorate of Competition. Preliminary discussion gives the entire procedure flexibility, because it allows you to collect the necessary information in advance to make a decision. The transaction must be submitted to the European Commission for consideration if the turnover of the company exceeds a certain threshold. Alternatively, local antitrust authorities may consider the transaction if the company’s turnover does not reach a certain threshold level. These rules are applicable to all transactions, regardless of where the headquarters of the company is located or where its main production is located. This is because companies located outside the European Union can influence the EU markets if they operate in the Community. Thus, companies with significant revenues within the EU should receive the approval of the Commission to conduct the transaction. A distinctive feature of Regulation No. 139/2004 is the fact that a special role is assigned to economic analysis. Thus, a special test was included in the content of the regulations, according to which a ban on mergers transactions is implemented and this test significantly undermines “fair” competition. To assess the degree of monopolization of the industry, the Herfindahl-Hirschman index is used. It is a measure of industry concentration and is calculated as the sum of the squares of the market shares of all firms in the industry. The quantitative parameters of large mergers are also determined: the total annual turnover in the world market is more than 5 billion euros or the annual turnover in the EU market is more than 250 million euros.
It should be noted that in addition to the market share, many other factors are evaluated. It analyzes how different the production of merging companies is, whether there are reserve productive capacities in this particular market, whether there are indications that the acquired firm was the engine of competition and so on. The main objective of such a detailed study is to forecast the consequences of the transaction, its impact on competition: the risk of entry barriers to new companies, the impact on prices, the diversity of goods and services, and the incentive for innovation. And special attention is paid to horizontal mergers and acquisitions. With a merger in a banking sector, things are more complicated.
For example, an important feature of the entry barriers in the banking industry is the lack of patent protection of innovations. In this connection, any financial innovation, any new banking service introduced by one credit institution, can be reproduced by its competitors within a short time. This intensifies the intensity of competition. At the same time, if the intensity of intra-industry competition for an individual institution depends on the degree of its universalization (or specialization), then the intersectoral competition is the more intense, the more attractive in terms of profitability and development prospects is a particular banking industry or sub-sector.
The competition is observed both between individual banks, and between the largest unions of bank capital. In the latter, the desire for a monopolistic agreement, for the unification of banks, is becoming stronger. Large financial transactions – of various joint-stock companies – are increasingly carried out not by any individual bank, but by agreement between several leading banks. The centralization of bank capital is manifested in the merger of large banks into the largest banking associations, in the growth of the branch network of large banks. Banking associations are giants banks that play a dominant role in banking. There are several forms of banking associations:
Bank cartels are agreements that restrict the independence of individual banks and free competition between them by harmonizing and setting uniform interest rates, pursuing the same dividend policy, and the like.
Bank syndicates, or consortia, are agreements between several banks for joint large-scale financial transactions.
Banking trusts are associations that arise through the complete merger of several banks, and there is a pooling of the capital of these banks and a unified management of them.
In the next sub-chapters author will explain the dubious nature of a merge in details by analysing the case law of EU and by seeking an answer on question: ”When and why mergers of banks can endanger the competition?”.
Mergers of the bank threatens the competition stability – when and why?
The banks are maintaining their traditional activity of transfer and transformation of funds – financial intermediation – but have introduced also new production methods. Instead of managing checks, they offer online transfer services and bank cards, instead of discounting bills of exchange, they use scoring methods to grant credits, they provide the service but no longer necessarily bear the risk over their entire lifetime. But most importantly, banks have developed new service-producing activities in retail banking (especially bank-insurance) and investment banking (asset management, off-balance sheet activities) which allows them to collect other types of commissions. As a result, the production function of banks has changed and this shift has shifted banks from producer to distributor.
As noted, there has been a substantial change in countries over the last decades in the fact that competition policy has been applied more effectively in the financial sector. This reflected the rallying on the theoretical point of view that the promotion of competition is not necessarily at the expense of stability and the fact that the supervisory authorities have had more opportunities to ensure the stability of banks through for example, the regulation of capital with the Basel agreements. Overall, strengthened competition control in the banking sector has been successful in revealing anticompetitive behavior and potentially anti-competitive mergers.
In addition, this appears to have generated significant externalities by helping to limit the discretionary nature of control policies by creating some sort of “verification and balancing” system for the operation of sector regulators. In this respect, and with respect to Europe in any case, the Commission has played an important role in revealing national protectionism, particularly in the case of certain cross-border mergers.
Despite this trend, there are several important exceptions in the design of competition rules for the financial sector and the institutions responsible for their application. In Canada, Netherlands, Switzerland and the European Union, for example, merger review by the competition authorities may be suspended or a negative decision may be overruled due to concerns about stability of the system. This “stability exception” is usually applied by a political body such as a ministry or by the supervisory authority of the sector itself.
The first question is whether the objectives of competition and stability must be assessed on a case-by-case basis or whether the objective of competition should always be subordinated to the objective of stability in case of opposition. If, on the other hand, the two objectives are to be assessed, then the identity of the institution responsible for making the final decision is obviously essential in determining the importance attached to the objectives of stability and competition.
In principle, it may be thought that a political body is more likely to give equal importance to both objectives when making a decision on a specific case than the supervisory authority of a sector, but the thesis is complex and many things may depend on the reputation of the institutions involved and the level of accountability, corruption and hostage-taking of regulations in a given country. Another problem in the European context is whether the stability exception should be applied by some kind of supranational authority rather than by the Member States, given the level of integration of capital markets. and supranational effects of mergers examined by the Commission. The problem is related to the current debate about whether it is necessary to have a European banking supervisory authority, also in view of the attempt by some Member States to apply the stability exception to obstruct the integration process.
Continuing to seek an answer to the question of the chapter, consider the features of the merger of big financial institutions.
Mergers of large financial institutions often go hand in hand with the inflow of public funds in one form or another and can be encouraged by the state. This contribution of funds can take the form of loan guarantees, for example. Alternatively, when governments mount large-scale merger transactions, they may acquire a certain number of shares of the merged institution as part of what might be considered a partial nationalization. These ‘mega-mergers’ can easily distort competition. They may involve financial institutions with strong balance sheets merging with weaker financial institutions, for example, which can affect the competitive balance, especially for smaller players remaining in the market. Declining global competition will then be accompanied by lower deposit rates and higher loan rates.
There is no obvious solution to simultaneously compensate for any potential anti-competitive effects of these operations because of the highly oligopolistic organization of the banking sector in many countries. A merger that falls within the framework of the rescue plan of a financially unstable institution must therefore be considered as an emergency measure that is only used when it is necessary to escape an insolvency situation and avoid precipitating a crisis. more general systemic. Nevertheless, exit strategies can be defined for such anti-competitive mergers sponsored in one way or another by the state. These strategies can be implemented when things return to ‘normal’. From a competition point of view, nationalization, whether partial or integral, may be preferable to purely private mergers, because it is usually easier to reverse nationalization or to put an end to other forms of public support than to dismantle a large conglomerate.
In addition, nationalization does not create and strengthen as much the commercial power of an institution as mergers between private interests and provide a clearer guarantee of solvency. Nevertheless, partial or full nationalization is more likely to give rise to government control over operational decisions and may affect the state accounts. When reselling nationalized institutions, consideration should be given to improving the market structure, for example, by dismembering an institution prior to sale or selling it to a foreign rather than a national purchaser.
In the context of globalization, mergers and acquisitions are an important tool for economic development. Traditionally, in developed countries, the largest share of foreign direct investment is in the form of transnational mergers and acquisitions.
Mergers and acquisitions go through periods of ups and downs, as well as economic activity in general. Economic history has six cycles of mergers and acquisitions, the last of which ended in 2008. The total number of mergers and acquisitions in the world grew rapidly in the 1990s, peaking in 2000 amid a growing securities market and financial liberalization in all over the world. In 2000, the fifth wave of mergers and acquisitions ended, followed by a decline in the number and value of transactions. From 2003 to 2008 The sixth wave continued, characterized by the growing role of globalization: merging companies sought to create multinational corporations.
Banks are second class institutions in the service of monetary policy. This singularity leads the authorities to arbitrate between two objectives: competition and stability. The competitive process is ”darwinian”, that is, selective. It induces the eviction of the most inefficient institutions. On the contrary, the stability policy aims to preserve banks from the risk of bankruptcy by subjecting them to a set of regulatory constraints that impede the competitive process. These two objectives are therefore a priori antagonistic. Also, the authorities have long favored a prudential approach to the detriment of competition. Bank profitability reinforces the stability of the banking system.
In autors’ opinion, combining banks into one organism and reducing the number of banks should lead to a drop in the number of interbank settlements, as most transfers will be carried out within the framework of internal settlements of banks.
The efficiency of the payment system should increase as the number of institutions on the market decreases – the more the more structural changes favor the technological modernization of the banks’ transaction systems. Changes in the structure of the supply of banking services may also affect the availability of services to clients. While in the area of ??services for large customers, concentration may be of lesser importance, as banks follow their large customers as a rule, availability of services for small clients may suffer under certain conditions.
Nevertheless, the trade-off between competition and stability is evolving with the strong trends affecting the banking sector, and has gradually shifted in favor of the former. The prospect of creating the single market and the rise of information technologies are behind this change. For example, in France, the liberalization of the market has resulted in a decrease in the rent granted to banks by the authorities via the regulatory system, and an intensification of competition.
On the agenda, events related to Brexit. The largest British banks are preparing to move from Britain to the European Union, among them – large investment banks Goldman Sachs, Bank of America Merrill Lynch, Deutsche Bank, Morgan Stanley, JP Morgan and others.
For the successful functioning of a single European market for goods and services, it is necessary that equal competition conditions be created, standards are simplified and unified in a single economic space. Thus, it is possible to achieve the provision of equal opportunities for all economic entities, the rational allocation of resources, the reduction of production costs, the reduction of prices, and the competitiveness of European goods in world markets.
Analysis of the effect of mergers in the case law
For a better understanding of the effect of mergers and its consequences, it is necessary to analyse a case law. Author decided to take some examples, where outcomes also differs and it demonstrates a relativity of a mergers transactions in a banking sector.
First example is connected with Baltic countries and recent events – On 9 August 2017, the European Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No 139/20043 by which DNB Bank ASA and Nordea Bank AB join their banking operations in Estonia, Latvia and Lithuania and create a new bank, called Luminor Group AB which will be jointly controlled by DNB and Nordea.
From a competitive point of view, this merger transaction is considered as a consolidation of both banks in order to reduce costs and in the longer term could strengthen its competitiveness in the relevant markets. It is difficult to predict the pros and cons of both the competition and the public from the merger of both banks, on the one hand, looking at the publicly available financial data of both banks, this merger does not pose a threat to the monopoly.
On the other hand, both banks have to invest impressive work and financial resources in order to realize the particular merger transaction, for example by creating a joint banking system and offering a single policy across the Baltics offering various services to clients. Thus, the possible merger of both banks does not guarantee the intense struggle for market leader and new products. It would take a long time for a fully-fledged new entrant to compete for leadership. In addition to the merger of both banks, the employees of both banks in the Baltics could also suffer, as is the case with any corporate consolidation. At the same time, looking in the near future, the new bank would be able to export strong coverage both geographically and economically. While Nordea currently has a large corporate coverage, DNB is in the service of small businesses. Geographically, Nordea prevails in Estonia, while DNB – in Lithuania, until the union of both banks is a very rational and beneficial decision to complement each unbundled market sector. Potentially, this means additional opportunities for customers in combining their needs and operating costs in different countries. Taking into account that the greatest benefit of bank mergers is the reduced transaction costs, customer service costs will also be lower. It should also be taken into account that at the moment when the banks will unite, their total assets will be almost the same as the current market leader Swedbank. Consequently, offering both new and emerging opportunities for customers to become a clear market leader in the battle of both banks will become a fundamentally important aspect of the new market situation.
Second case study, is more significant due to its value. ABN AMRO is a Dutch bank established in 1991 as a result of the merger of Algemene Bank Nederland (ABN) and Amsterdam and Rotterdam Bank (AMRO). In 2007, it was the largest bank in the Netherlands and the eighth bank in Europe by assets. In 2007, ABN AMRO was purchased by a consortium of banks consisting of RBS, Fortis bank and Banco Santander. As a result of the financial crisis and the problems that the consortium and Fortis had in particular, the Dutch government in 2008 gained control over all Fortis operations in the Netherlands, including the part of ABN AMRO owned by Fortis. The remaining parts of ABN AMRO, in particular foreign business, were merged with RBS and Banco Santander, sold or closed. On July 1, 2010, the merger between ABN AMRO Bank and Fortis Bank Nederland was completed with the creation of a structure called ABN AMRO Bank N.V.
The acquisition of ABN Amro was the largest transaction in the banking sector. Barclays offered for the bank 67.5 billion euros, of which about one third was ready to be paid in cash. The Scottish Royal Bank of Scotland, the Spanish Santander Hispano and the Dutch-Belgian Fortis were ready to pay 72 billion euros, of which 93% was in cash. As a result, Royal Bank of Scotland has bought ABN Amro, won the competition from Barclays, tried to merge – in a competitive market there is no Royal Bank of Scotland, no ABN Amro.
Next case analysis will demonstrate how a State Aid could be combined with a merger transaction and displaying a complexity of a competition law application.
In 2011, the largest Spanish bank Caixa (the third in Spain in terms of assets) decided to reorganize its banking business. The assets of La Caixa for a total of 1,776 billion euros were sold to the subsidiary structure of Criteria Caixa Corp, which became a new banking group, changing its name to CaixaBank. This restructuring was necessary for Caixa to further diversify its activities.
The deal was implemented as follows. The first step was the transfer of the structure of Microbank, which is 100% owned by La Caixa, the entire banking business of the Spanish holding. In the second stage, Criteria acquires Microbank shares in exchange for some of its industrial assets and part of the shares. At the final stage, Criteria merged with Microbank, forming a new structure of CaixaBank.
Measures to restructure the banking business of La Caixa allowed the creation of a new strong structure CaixaBank, which will become the largest Spanish bank and the 18th largest bank in Europe. The new bank received the best in Spain, with a very low overdue debt ratio of 3.71%, the most complete coverage of overdue loans (70%) and the highest fixed capital ratio – 10.9% after the deal ended. The second important step was the purchase in 2012 by CaixaBank of the nationalized bank by a state – a bank Spain Banco De Valencia. This transaction was approved by the Governing Committee of the Fund for Orderly Bank Restructuring. According to the transaction, CaixaBank received 98.9% of the shares of Banco de Valencia from the hands of The Governing Committee of the Fund for Orderly Bank Restructuring at a price of 1 euro per share in exchange for an infusion totaling 4.5 billion euros. The deal, therefore, allowed the creation of Spain’s new largest financial structure with a total assets of 365 billion euros.
The main objective and outcome of a merger or acquisition transaction is the synergy effect, i. e. when the effect of joint operation exceeds the amount of the effect obtained by the separate functioning of companies. This is a positive synergy. The complexity of evaluating this effect before the transaction is the presence of a variety of factors that affect the final result of the operation.
CONCLUSIONS AND RECOMMENDATIONS
The conducted research allowed to formulate the following conclusions and recommendations:
In the conditions of instability of the world financial system, latest trends and the strengthening of the influence of globalization processes, the support of the development of new financial technologies, supported by the digital sphere and the private sector should be a top priority for the Competition Commission.
Ensuring the transparency of the activities of the banks is one of the essential conditions for strengthening discipline in the banking services market, improving the quality of corporate governance and increasing public confidence in the banking sector.
Due to the peculiarities of the functioning of bilateral markets, the holders of the payment cards, are in a better position. At the same time, the participants of payment card markets, by stimulating such an imbalance in order to maximize their own profit, will not be interested in taking any measures to change this state of affairs. Thus, a moderate and balanced intervention by the competent state authorities, acting as counterbalances to market participants, with the aim of helping to eliminate such an imbalance and maximize the benefits of all stakeholders, can be fully justified, as evidenced by the world’s current trends in part of the state regulation of interchange fees, expressed in a decrease in its value.
The focus of government bodies in the regulation of Interchange fees should first of all be aimed at examining the market of payment cards, encouraging market participants and their clients to engage in dialogue, actively searching for and developing joint initiatives and approaches that would best suit all interested parties, social features of the functioning of the payment card market.
The adequately addressed State Aid seems to be particularly justified, facilitating the overcoming of barriers occurring in crisis conditions and stimulating the increase of competitiveness of the entire financial sector, with which it seems that we are dealing in recent years.
To date, in the banking sector, mergers and acquisitions are still very popular. Of course, the financial crisis of 2008, as well as the euro zone debt crisis, which continues so far, have reduced the growth rates of the banking mergers market, but the same events, on the other hand, spurred the spread of such transactions to counter the complicated economic climate.
From the strategic point of view, the current merger transactions in a banking sector in Europe are primarily determined by the desire to increase the efficiency of asset functioning through the reorganization of large holdings, as well as to support large financial groups that are on the verge of bankruptcy in order to prevent a new round of global economic crisis.
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Slobodenuka A. Application of Competition Law in the Banking Sector, master thesis. Supervisor Assoc. prof. dr. Raimundas Moisejevas.–Vilnius: Mykolas Romeris University, Faculty of Law, 2018.
In this master thesis author has analyzed a link between a competition law and banking sector and main issues connected with it. In the first chapter was analysed a link between a competition and a banking sector, in the second – interchange fees issues, in the third chapter author was analysing an impact of the State Aid on the financial institution from the competition point of view, and, finally, in the fourth chapter was studied a stability problematics in the bank in case of mergers. In the end of the master thesis conclusions are made.
Key words: competition, state aid, mergers, anticompetitive agreements, interchange fee.
Slobodenuka A. Application of Competition Law in the Banking Sector, master thesis. Supervisor Assoc. prof. dr. Raimundas Moisejevas.–Vilnius: Mykolas Romeris University, Faculty of Law, 2018.
In this master thesis author has analysed an application of competition law in the banking sector. The EU law creates restrictions on the actions of the antimonopoly authority in terms of direct impact on the market structure. In this regard, the rationale of the thesis leads to the conclusion that the EU is too delicate in the competition law of the European Union, which is expressed in the fact that it involves preventing conscious economic activities aimed at restricting competition on the part of economic entities, while much less attention is paid to control over the structure of the financial market. This contradiction makes the topic of the thesis relevant and topical.
The master thesis consists of four chapters, each introducing one of the objectives of the thesis. In the first chapter was analysed a link between a competition and a banking sector, in the second – interchange fees issues, in the third chapter author was analysing an impact of the State Aid on the financial institution from the competition point of view, and, finally, in the fourth chapter was studied a stability problematics in the bank in case of mergers.
This master thesis research problem is: to analyse and to reveal weak spots of a financial sector related with competition law and to propose some recommendations. Author determined a geographical area of scrutiny – an application of competition law in banking sector in Europe (Baltic countries, France, Germany and other European countries). The Aim of the research is to analyse how to minimize the negative consequences associated with supranational antimonopoly regulation, ensuring not only effective protection of competition, but also harmonious economic development of the Union as a whole. The objectives to reach the aim of this master thesis are:. The defended statements of this master thesis are: to analyse the basic concepts and definitions implemented in the sources of competition law in the field of the banking sector, to conduct a theoretical analysis of antitrust investigations in the payment card market and main problematic aspect of interchange fees, to evaluate an impact of State aid on a functioning of financial markets, to scrutinize the main aspects of the mergers and acquisitions in the banking and issues related to that. The defended statements of this master thesis are: the banking sector may suffer from excessive competition, which has a negative impact on the entire economy of the country; the objectives of the competition law coincide with the objectives of legal regulation in the economic sphere in general. They should be viewed in a complex and in close interaction with each other. Otherwise, the competition law of the European Union may be ineffective. All these defended statements were confirmed and in the end of the master thesis the conclusions and recommendations were made.
DECLARATION ON INDEPENDENCE OF THE MASTER THESIS
I, Anastasija Slobodenuka, student of Mykolas Romeris university (hereinafter – University), Faculty of Law, Institute of Private Law, European and International business Law study program, declare that the this master thesis “Application of Competition Law in the Banking Sector”:
1. Is written independently and fairly;
2. Was not presented in any other higher education institution in Lithuania nor foreign country;
3. Is written respecting principles of academic writing and is based on methodic guidlines for writing a final thesis.
I am informed that the sudent can be expelled from the University for violation of academic ethics, if the principle of fair competition (i.e. plagiarism) is violated.