Competition Policy in the Banking Sector after the Crisis: The Spanish Case Jorge Padilla Jornadas de Economía Industrial Alicante, 4 September 2015

The Spanish Banking Crisis ( ? ) 2  Real state boom triggered by an overly lax monetary policy and populist and extractive fiscal and economic policies  Poor management and inadequate governance of the cajas and, to a lesser extent, banks led to the accumulation of real state risk in the portfolios of banks and, especially, of the cajas  Increased reliance on wholesale funding and securitization vehicles to fund the real state boom exposed banks and cajas to a global credit crunch  The global credit crunch caused by the implosion of the US subprime market and the collapse of the real state bubble placed some banks and many cajas in financial distress

The Spanish Banking Crisis ( ? ) 3  The banking crisis evolved slowly at first due to the cushion provided by the dynamic provisions requested by the Bank of Spain at the peak of the cycle  By , the Spanish government and the Bank of Spain pursued a double strategy of mergers and aggressive loan provisioning in response to the crisis.  The merger strategy combined good and bad assets and spread the crisis across the system. It also created a systemic entity: Bankia  The duration of the economic crisis and the inadequate response given by the Spanish governments, the Bank of Spain and the ECB to the challenges they faced led to the collapse of the cajas and the MOU in 2012  The crisis produced a more concentrated banking system

Market consolidation 4

5

Lenient merger control 6

7  Market definition – Retail banking – PCAs and banking services to SMEs – National market  Departure from prior rulings  Limited or no economic analysis: the role of the Bank of Spain  Significant implications for competitive assessment  In contradiction with market definition in other jurisdictions e.g. the UK  Regional markets for PCAs and SME products

Lenient merger control 8  Competitive assessment – Based on market shares at national level – Ignores closeness of substitution at regional and local levels – Considers retail banking to be contestable:  No legal or technical barriers to entry  No network effects – branches / ATMs  No switching costs – Concludes that increase in concentration is small to be meaningful and that, in any event, there is no link between concentration and competitive outcomes

Lenient merger control 9  Competitive assessment

Lenient merger control 10  Competitive assessment – Greater concentration leads to worse outcomes for consumers – Banks with market power are prone to cost and profit inefficiencies – The provision of financial services relies on various networks such as the use of ATMs and credit bureau’s information

Lenient merger control 11  Efficiencies – Types of efficiencies:  Savings in SG&A costs  Employment cuts  IT consolidation – No quantification of synergies – No assessment of pass on to consumers – No assessment of indispensability – Compare and contrast with treatment of efficiencies in other Spanish or European merger cases

More (anticompetitive) mergers? 12

Other problematic behaviour? 13

Other problematic behaviour? 14

A competitiveness problem? 15

Conclusion – Time for a Market Study 16

Thank you!