Competition Policy in a Crisis?

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Competition Policy in a Crisis?

• IDRC pre-ICN Forum
• 2nd June 2009

Paul Seabright, Toulouse School of Economics
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Drawing on

• Bailing out the banks Reconciling stability and
  competition An Analysis of State-Supported
  Schemes for Financial Institutions, report
  submitted in May 2009 to DG-Competition by
  Thorsten Beck, Diane Coyle, Mathias Dewatripont
  and Paul Seabright

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Outline

• Has the crisis made competition policy
  irrelevant?
• Understanding the origin of the crisis
• How is banking different from other sectors
• Implications for policy

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Has the crisis made competition policy
irrelevant?

• Is it rearranging the deck-chairs on the
  Titanic?
• No the crisis is very costly and a poor
  resolution will make it even costlier, via
  increased risk-taking, ill-considered mergers,
  diversion of fiscal resources
• Was too much competition responsible for the
  crisis in the first place?
• No profits were high before the crisis
  excessive risk-taking was not the result of
  squeezing margins

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Understanding the origin of the crisis

• On this see the excellent paper by Gary Gorton
  Slapped in the Face by the Invisible Hand
  Banking and the Panic of 2007
• In short, the crisis was a panic, but NOT an
  irrational panic, and NOT a panic among retail
  investors. It was a sudden and correlated loss of
  confidence in the shadow banking system caused by
  the failure of some asset prices, notably real
  estate prices to continue an unsustainable rising
  path
• It has had huge real costs in asset write-downs
  (the result of pre-crisis behavior) and frozen
  lending (post-crisis behavior)

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Source Gorton (2009)
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Some EU member state banking interventions
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How is banking different from other sectors?

• In the crisis the supply of banking services
  falls much faster than demand (unlike for cars)
• When banks are bailed out most competitors
  benefit (unlike for cars)
• Banks leverage responds much faster to their
  economic conditions than that of other firms
• The social costs of bank bankruptcies can be much
  higher and much harder to calculate

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Implications for policy

• Competition policy principles are different for
  banks in a crisis they are doing too little,
  not too much, and their activity favors, not
  hurts their competitors
• But that doesnt mean competition policy should
  not apply!
• It needs to work hand-in hand-with regulatory
  reform
• And consider burden-sharing shareholders,
  creditors, taxpayers
• But simply putting competition policy on hold
  could cause great and lasting damage

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Competition Policy in a Crisis?

• IDRC pre-ICN Forum
• 2nd June 2009

Paul Seabright, Toulouse School of Economics