This paper can be found here.


Systemic crises reopen the question of what is the role of competition policy in such scenarios. The main issues are whether competition is desirable at all in times of systemic crises, and how to limit potential negative effects of state intervention on competition in the medium and long term.

The paper investigates these questions, and is particularly interesting because it was written while the aftershocks of the crisis were still being felt. It notes that while the crisis started in the financial sector, it had an important impact on the real economy. Nonetheless, the paper focused mostly on interventions in the financial sphere, which are – at least at present – of limited interest to us. As such, I will focus on the sections of the paper that are likely to prove more relevant to us going forward.

Section II provides an overview of the relationship between the financial sector and competition law.

Most of this section is not really relevant for us. It discusses characteristics of financial markets such as the imbalance between normal short-term claims and long-term liabilities, the risk of bank runs this creates, moral hazard, crisis contagion and safety net arrangements. The section also discusses how competition policy was applied cautiously in the banking sector for a long time – with banks being practically exempt from competition law until recent decades.  This reflects the fact that, while the general argument in favour of competition in terms of cost minimization and allocative efficiency applies to the banking industry,  the standard competitive paradigm may not fully apply to this sector because of features like  asymmetric information in corporate relationships, switching costs and network effects in retail banking.

At the same time, the balance that was long struck between promoting competition (in terms of efficiency, quality provision, innovation and international competitiveness) and preventing systemic instability was far from being optimal. Until the 1980’s, the prevailing view both in the academic literature and in the policy arena was that competition created instability. In particular, intense competition was perceived to favour excessive risk taking, thus leading to a higher risk of individual bank failure. Regulation was believed to help mitigate this perverse link – and, as such, it was tight, and central banks were in many instances complacent with collusive agreements among banks, sometimes even fostering them. The view on the trade-off between competition and stability has since evolved. Recent work shows that panic runs can occur independently of the degree of competition in the market and that the negative relationship between competition and stability is not particularly robust. Finally, some empirical evidence finds that fewer regulatory restrictions – lower barriers to bank entry and fewer restrictions on bank activities that foster competition – lead to reduced banking fragility, suggesting that regulatory restrictions limiting competition are not beneficial in terms of stability.

Section III looks at the role of competition policy in financial sector rescue and restructuring.

During the last financial crisis, state aid, nationalisation and mega-mergers all took place, and two schools emerged as regards the role of competition law. Some argued that competition rules should be suspended for the duration of the crisis, thus allowing regulators to focus only on the objective of safeguarding the stability of the financial system. Others stressed instead the importance of applying strict competition rules during a crisis in order to ensure a level playing field and a coordinated reaction to the crisis, and to avoid a wasteful subsidy race between countries to attract depositors and investors. Moreover, the long-term effects of relaxing competition policy can be serious. Mergers that lead to very concentrated markets in particular are almost impossible to reverse.

Section IV considers the challenges for competition policy in periods of retrenchment in the real economy.

During times of recession and/or depression, it is sometimes suggested that lighter enforcement of competition laws would be appropriate. In past crises, competition authorities have been under strong political pressure to suspend competition policy in entire industry sectors or to dilute antitrust enforcement standards, by allowing governments to support companies in distress with public subsidies or by relaxing the rules for anti-competitive mergers or cartels in order to reduce pressure on prices due to fierce competition.

However, there is evidence that this is an unwise approach because it actually retards the process of recovering from recessions and depressions. For example, the suspension of competition laws in the U.S. during the 1930s made the Great Depression last longer. Similarly, studies show that when the Japanese government restricted competition in structurally depressed industries in the 1990s, the result was a prolongation of Japan’s recession.

Governments should minimise the negative competitive impact of their interventions. In designing their support schemes, they should follow non-discriminatory principles taking into account that any national support entails a high risk of creating negative spillovers in the other states given the global dimensions of many markets. Moreover, public policies should not aim at supporting firms who were in distress before (and independently from) the crisis.

Section V looks forward, and considers how competition rules, processes and institutions should have adapted to the issues facing the financial sector at the time.

While a significant portion of this discussion focuses on matters of exclusive relevance for the financial sector, some observations have a more general application.

In particular, the paper discusses whether competition policy should focus exclusively on consumer welfare or should also pursue other objectives like general economic and systemic stability. Without taking position, it is noted that this balancing can be pursued in several ways.  One possibility is explicitly to incorporate objectives other than consumer welfare in the institutional design of competition policy. Another option is to let competition authorities focus on consumer welfare, and let another institution or political body weight the importance of consumer welfare against other concerns in case it is needed. Which system is better is difficult to judge a priori. On the one hand, an enlargement of the objectives of competition authorities beyond consumer welfare has the benefit of keeping potential trade-offs between competition concerns and other concerns within the same institution that will take the protection of competition seriously. On the other hand, it may have the negative consequence of increasing the pressures on the competition authorities and thus the risk of regulatory capture. Furthermore, competition authorities may not be in the best position to judge the macro-economic effects of a concentration, a collusive agreement or any policy initiative because of lack of complete information or competence. In this respect, some form of cooperation between competition authorities and sector regulators seems both preferable and inevitable.

Another important topic is how to remove exceptional measures adopted during a crisis. Once the crisis is over, many exceptional actions will no longer be necessary for achieving key government objectives. Governments will then need to consider eliminating anti-competitive developments that may have occurred during the crisis. As the crisis expands and reduces real economic activity, industries with structural problems become the focus of public aid – e.g. nationalisation, capital injections, extended liquidity facilities, and state acquisition of ‘toxic assets’. A condition for aid should be that the industry is sustainable, or, if not, that aid be accompanied by structural reform to ensure its sustainability. Thinking and designing exit strategies from anti-competitive megamergers is also of paramount importance, given they are more structural than other forms of crisis management. In this respect, nationalizations are preferable to megamergers, because they create less market power and provide a clearer solvency guarantee. It is worth mentioning that the paper ends with a detailed discussion of possible exit strategies, which is too long to describe here.

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