The Competition Authority has today issued Discussion document on competition in the banking market. With this, the Competition Authority aims to encourage financial institutions and the government to pay attention to competition issues in financial market policymaking and to present its views on bank mergers.
One of the factors that will be decisive in the reconstruction of Icelandic business life is how financial activities will be conducted in this country. Effective competition in the financial market is particularly important for both the business community and consumers. It contributes, among other things, to job creation and the competitiveness of Icelandic companies.
The Competition Authority believes that financial market policy must prevent homogeneity in structure and mindset, and create the conditions for a vibrant market and innovation in the sector. The Competition Authority is wary of larger commercial banks buying or taking over smaller financial firms, and of the creation or strengthening of a cosy market of two or three larger banks that do not face the threat of external competition. Such a market structure is detrimental to the public and the business community.
The main findings of the report are:
- Concentration in the banking market has increased significantly since 2008, with a reduction in the number of financial institutions and larger banks taking over savings banks' deposits. The calculated concentration index (HHI) is currently close to 2,700 points, whereas the index did not reach 2,000 points before the crash. Such high concentration creates a risk of anti-competitive practices resulting from coordinated behaviour among competitors.
- Barriers to entry in the banking market are high, and it is difficult for consumers to switch banks. The competition authority believes that the opportunity presented by the upheaval following the crash should be used to facilitate access to the banking market and reduce the cost of switching banks. This increases competition and enables smaller competitors to grow.
- The banking system is too expensive for its current scale and needs to be streamlined. Operating costs for Arion Bank, Íslandsbanki and Landsbanki increased by 7.5 billion króna between 2009 and 2010, or by 12% in real terms. Staff numbers increased by 200 over the same period.
- Efficiencies can be achieved by means other than mergers. The Competition Authority believes that very serious competition problems can arise from mergers of commercial banks, at least in cases where one or more of the major banks are a party to such a merger. In this regard, it is worth pointing out that the efficiencies that may result from a merger are often illusory. The majority of academic studies on the effects of bank mergers indicate negligible efficiency gains from mergers.
- It is necessary to bear in mind that conditions in the financial markets can change rapidly, as recent events have shown. The financial market is characterised by great uncertainty and currency controls, and the financial strength of the banks is not yet known. Furthermore, radical changes in the monetary system may occur, which could completely transform the market.
Páll Gunnar Pálsson, Director-General of the Competition Authority:
„It is clear to everyone that it is necessary to rationalise the banking system. The problem lies in how this should be done. Research shows that the benefits of bank mergers are often illusory. The bottom line is that bankers need, first and foremost, to get their own house in order.“
The Competition Authority invites submissions from stakeholders and other interested parties by 31 May 2011.
The discussion document.
