Abuse Regulation and the Financial Sector in the Wake of the Financial Crisis

Posted by Social Science Research Network

Abuse Regulation and the Financial Sector in the Wake of the Financial Crisis Luis Silva Morais Sr. (University of Lisbon) & Lúcio Tomé Feteira (European University Institute)

Abstract: It is customary to break the analysis of the financial sector into three sub-sectors, namely banking, insurance and capital markets. This exercise, which serves the analytical purpose of identifying the three major types of financial institutions and the corresponding financial services they provide – in spite of the growing interpenetration of such areas – is equally useful for the purpose of reviewing the application of competition rules to the financial sector which is the overriding goal of this paper.

The importance of the financial sector can hardly be overstated as recent events have once again reminded us. The financial crisis that broke out in 2007, first in the US triggered by subprime mortgage sector but rapidly extending to Europe, where its effects were compounded by real estate bubbles and excessive debt levels in certain Member States, leading somehow to a vicious circle of banking crises and sovereign debt crises that have threatened the existence itself of the Euro area, proved once again the economic importance of the financial sector. In fact, the 2007-2009 financial crisis has, to some extent, lasted to this day as a consecutive economic crisis, involving, in the EU, a crisis of sovereign debt markets intertwined with the crisis of the banking sector and, in the US, at least in a first stage, slow growth, and, with the return to higher levels of growth, persistent high levels of unemployment. Although it would be beyond the scope of this Paper to delve into the causes of the financial crisis, there is one that is worth recalling as it connects directly to our topic: deficient and inadequate regulation and supervision of the financial sector – largely due to an insufficient perception of risks incurred by financial institutions – combined with a selective application of competition rules.

While the most dramatic stages of the banking crisis appear to be over and the need for remedial intervention, most notably under the shape of State aid, is rapidly subsiding, it comes as no surprise that the European Commission’s present focus is on preventing a repetition of the financial crisis. Part of the effort involves the introduction of a new regulatory framework, but reinforcing or at least rethinking antitrust enforcement is an equally necessary step towards prevention. The link between the financial crisis and antitrust infringements in the financial sector accounts for the renewed impetus of antitrust enforcement in the field of financial services. Antitrust enforcement is a much needed supplement to the new regulatory framework if one is truly committed – as the Commission seems to be – to bring about a radical change in the way the financial sector has operated so far.

Considering that lack of competition in the financial sector and antitrust infringements were part of the events leading up to the 2007 financial crisis, one may legitimately question whether it is all a question of more forceful antitrust enforcement. The alternative would be to argue that the matter is not simply one of quantity but also of quality, as the existing legal framework may not be sufficient to address all the challenges posed by the financial sector. The case in point is the need for reinforced interaction between regulation and supervision of the financial sector and the enforcement of competition rules applied to the latter. This paper will argue in favour of the second option.

While the general topic of this paper is the application of EU competition rules – most notably Articles 101 and 102 TFEU – to the financial sector, it will nevertheless focus on the prohibition of abuse of dominance and its interaction with the regulation and supervision of the financial sector. Our purpose is to provide a general, albeit succinct, overview of the recent evolution of competition rules in the financial sector as it has emerged from a number of high-profile cases concerning the banking, insurance and capital market sub-sectors. This overview will serve as the background against which we propose to reappraise abuse regulation in the financial sector through a combined perspective of the applicable competition rules and the existing regulatory framework.