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Published online by Cambridge University Press: 17 August 2016
To speak of applying a competitive policy to financial markets may strike many in Europe as a strange and futile exercise in economic theory. For years financial markets have been synonymous with large-scale government intervention and extensive regulations. Competitive policy was thought to have little or no applicability to these markets because of their regulated character.
Much the same attitude prevailed in the United States until the mid-1950's, when, rather suddenly, competition in banking emerged as a relevant public policy consideration. Manifestations of this policy shift are the Bank Holding Company Acts of 1956 and 1966 and the Bank Merger Acts of 1960 and 1966.
The author is Associate Professor of Economics, Columbia University School of Business. This article is the working paper CR1DE 702 and was done while the Author was a Visiting Professor at the Institut des Sciences Économiques, Université Catholique de Louvain, where he was attached to the Centre de Recherches Interdisciplinaires DroitÉconomie. As this paper is an outgrowth of a conference which the author gave for the Société Royale d'Économie Politique de Belgique, he wishes to thank Baron van der Rest and the other members of the Société for their kind invitation. The author has benefited extensively from numerous enlightening discussions with his colleagues Alex Jacquemin and Robert Wtterwulghe. He also appreciates the patience of his students at Louvain on whom many of this ideas were first tested.
(1) U.S. a. Philadelphia National Bank, 374 U.S. 321 (1963).
(2) From 1960 to 1969, the Department of Justice challenged thirty-one bank mergers under the antitrust laws.
(3) In an important sense, banks are also unique financial institutions. They are the only private institutions permitted to supply both demand deposits and short-term business loans. As such, all of their products may intrinsically carry an aspect of “product differen-tiation”.
(4) Although an “equitable” income distribution is omitted from these goals, it is implied by them.
(5) Empirical studies have shown that less competitive banking markets result in higher loan rates. See my Concentration in banking and its effect on business loan rates, Rev. of Econ. and Stat., Aug., 1964.
(6) See Leibenstein, H., Allocative efficiency versus X-efficiency, Am. Econ. Rev., June, 1966.Google Scholar
(7) Wall Street Journal, Pacific Coast Edition, April 19, 1965, 12.
(8) See Tussing, , The Case for Bank Failure, The Jour, of Law and Econ., October, 1967.CrossRefGoogle Scholar
(9) See Mayer, M., A Graduated Deposit Insurance Plan, 47 Rev. of Econ. and Stat.,114 (1965).Google Scholar
(10) It is hoped that the Commission Bancaire will make available more meaningful figures in the future. A study of the primary motivations for mergersand liquidations would be very illuminating.
(11) Although it is possible, even probable, that some small banks do an entirely different business than large banks so that they are not in “competition” with big banks, this possibility could hardly encompass all small banks.
(12) Although bank regulation exerts an important influence on capital requirements, such regulation may itself be a reflection of market realities, at least to some extent. In any case, there is clearly some benefit to large size in this respect, and, rather than ignore it, I have chosen to overlook the regulatory bias. More refined measures of financial economies are no doubt possible, but more available ones are not.
(13) BANQUE DE PARIS ET DES PAYS-BAS, BELGIQUE, évolution de la rentabilité et de l’endettement des sociétés belges en 1968, Service d’études, juin, 1969. The number of firms sampled in each industry is small, making these figures less than ideal.
(14) These high profits cannot be justified by arguing that banking is a high-risk industry. If anything, just the opposite is true.
(15) U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940); American Tobacco Co. v. U.S., 328 U.S. 781 (1946); Pevely Dairy Co. v. U.S., 178 F2d 383 (8th Cir. 1949).
(16) See Wilson, T. and Commanor, W., Advertising, Market Structure, and Performance, Rev. of Econ. and Stat., Nov., 1967.Google Scholar
(17) See Lamfalussy, A., La politique monétaire en présence des circuits financiers cloisonnés, Recherches économiques de Louvain, juin, 1967.Google Scholar
(18) Centre de recherche et d“information socio-politiques, Morphologie des Groupes Financiers, 1966.
(19) See F.T.C.v. Procter and Gamble Co., 386 U.S. 568 (1967).
(20) See Edwards, F., Tie-in Sales in Banking and One-bank Holding Companies, The Antitrust Bulletin, Fall, 1969.Google Scholar
(21) The Commission Bancaire is presently undertaking the first study of economies of scale ever done on Belgian banks. Hopefully, this study will be more penetrating and informative and will be available for public consumption.
(22) Table 2, presented earlier, indicates that the Commission Bancaire is already pursuing a liberal entry policy with respect to the chartering of new small banks.
(23) Benston, G.. Interest Payments on Demand Deposits and Bank Investment Behavior, Journ. of Pol. Econ., October, 1964.CrossRefGoogle Scholar
(24) See my: The One-Bank Holding Company Conglomerate: Analysis and Evaluation, The Vanderbilt Law Review, Nov., 1969.
(25) See, however, U.S. v. Morgan, 118 F Supp. 621 (S.D.N.Y. 1954).
(26) In Belgium, for example, government institutions account for approximately half of the savings deposits held in financial institutions.
(27) To the extent that government is able to borrow private savings at an interest rate below what it would have to pay under competitive conditions, the effect is equivalent to a higher income tax. The effect is undoubtedly regressive as well.
(28) I do not refer, of course, to monetary policy. Some intervention will always be necessary for purposes of monetary policy. All of the above policy recommendations have been made only after also considering their implications for monetary policy. More competition would, I believe, make monetary policy more rather than less effective. Lack of competition reduces substituability between the various financial assets, and less substitutability between assets reduces the impact of monetary policy on rates of interest. See Peltzman, S., The banking structure and the transmission of monetary policy, Journal of Finance, June, 1969;CrossRefGoogle Scholar and Silber, W., Portfolio Substitutability, Regulations and Monetary Policy, Quarterly Journal of Economics, May, 1969.CrossRefGoogle Scholar
(29) For an interesting discussion of this possibility, see Galbraith, J.K., The New Industrial State, Hamish Hamilton Ltd., 1967, pp. 98–100.Google Scholar
(30) Perhaps regulators, economists, sociologists, and even psychologists will someday also develop an incentive system for management which can serve as a substitute for the competitive market. At present, however, we dare not hope for too much in this direction.