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Competition in the financial markets

In a report the German Monopolies Commission analyses the development and the regulation of financial markets since the outbreak of the crisis. It says that since the financial crisis core competition principles habe been overrided in the banking sector. With bail-ins states have disregarded the principle that failing financial institutions have to quit the market and equity owners and creditors have to bear the losses. The Commission encourages politicians to equally and actively support the enforcement of competition rules in relation to existing structures, products and types of transactions on the financial markets.

Excerpt from the XXth Biennial Report (2012/2013)
9 July 2014
Monopolies Commission

>  excerpt Competition in the Financial Markets (226 p)

fundamental propositions and recommendations
  • In the short term, the financial crisis made substantial sovereign measures necessary to stabilise the financial system. After this aim has been reached, it is necessary to develop a balanced policy approach, taking into account aspects of both financial stability and of undistorted competition. This special chapter includes recommendations that are to the point in that regard.
  • The financial crisis demonstrated that implicit guarantees provide financial market participants with a systemic advantage in competition. The State aid proceedings concerning bank rescue measures could take account of this aspect only to a  imited extent. The Monopolies Commission advocates the speedy restitution of State aid by the institutions that have obtained such aid and still benefit from it.
  • The creation of a banking union is the right answer to the financial crisis and, from a competition policy perspective, must be geared towards three objectives: the neutralisation of existing implicit guarantees (in particular through the Single Resolution Mechanism), hindering the build-up of new implicit guarantees (in particular through capital requirements), and the increase of market transparency to identify such guarantees. The banking union will, however, only achieve these objectives if public discretion regarding an exemption from liability for individual market participants is reduced to a minimum, if the market participants build up sufficiently capitalised funding sources, and if regulation is the least complex as is possible. The Monopolies Commission considers additional efforts to be necessary in that respect.
  • It remains to be observed to what extent the present regulation will reduce implicit guarantees for banks. The further evolution of that regulation will in any event have to take account of shadow banking activities, based on a flexible approach.
  • The future revisions of the financial market regulation should be oriented at three guideposts, i.e., the avoidance and reduction of competition restraints through an unbalanced regulatory burden, the protection of German and European market participants’ competitiveness, and the need to counterbalance the ongoing fragmentation of the financial markets.
  • The German banking system has a stable structure due to its three-pillar composition. That cannot belie the perception, though, that it is interspersed with a multitude of structural distortions of competition – often emerging over a long period. The Monopolies Commission speaks out in favour of a review of the competitive situation by the competition agencies, and the removal of the identified distortions of competition.
  • The proceedings against large commercial banks and other undertakings due to the manipulation of reference rates, and certain developments of capital market trade militate, in the Monopolies Commission’s view, in favour of a stronger enforcement of the competition rules on those markets.
  • With regard to competition problems in the payments service sector and consumer protection as concerns financial services, the Monopolies Commission advocates a further improvement of cost transparency for the consumers.
  • Regulation should be reviewed with a view to removing privileges for individual financial products stemming from an implicit guarantee – as opposed to genuine advantages of those products (in particular, sovereign bonds, covered bonds).