This paper deals with cartels with a focus on the banking sector. This will be explained or examined using the case study of the Lombard Club (banking cartel in Austria around 1995).
The second chapter uses industrial economics to provide the basis for understanding restric-tions of competition, as well as cartels, supplier concentration, barriers to entry and their effects on the market.
In the third chapter, this market, which is imperfect because of betting restrictions, is exa-mined and analysed more specifically for the banking sector. Here the restrictive cooperation between banks and its effects on the market are described.
The fourth chapter examines the Austrian situation in the 1990s (beginning of cartel forma-tions and cartel agreements (including the formation of the Lombard Club). Here the situation on the financial market in 1990 is analysed. Furthermore, statements are made on competition and market concentration. The theories developed previously are used as a basis for this.
The fifth chapter focuses on the Lombard Club and its structures and facts about the cartel. It analyses the distortive measures of the so-called Club of Bankers in Austria in order to show how the measures have affected the Austrian banking market. The theoretical foundations previously elaborated will also serve as a basic understanding in this context.
The sixth chapter provides a summary of this topic and a conclusion with an outlook on the cartel situation in Austria and the EU.
Table of contents
List of figures
List of tables
1 Introduction
2 Theoretical foundations of competition economics
2.1 Focus on industrial and competitive economics
2.2 Main features of competition law
2.3 Restrictions of competition through agreements, decisions and concerted practices of undertakings
2.3.1 Cartel by agreement between companies
2.3.2 Cartel by corporate decision
2.3.3 Cartel through concerted behaviour by companies
2.4 Cartels through horizontal restrictions of competition
2.5 Cartel formation through vertical restraints of competition
2.6 Restrictions of competition through supplier concentration, merger, entry barriers
2.6.1 Prohibition of abuse
2.6.2 Market definition
2.6.3 Dominant position
2.6.4 Offences of abuse
2.6.5 Prohibition of abuse by companies with a superior market power/hegemony
2.6.6 Prohibition of restrictive practices, in particular boycotts
3 Competition between banks
3.1 Development in the EU
3.2 Barriers to market entry - Competition (restrictions) - Reasons for bank cooperations
3.2.1 Economies of scale
3.2.2 Capital requirements
3.2.3 Product diversification and conversion costs
3.2.4 Negotiating power of customers/banks and substitute products
3.2.3 Rivalry between banks
3.2.3.1 Market structure
3.2.3.2 Industry growth
3.2.3.3 Overcapacity
3.3 Conclusion of the chapter
4 Situation of banking competition in Austria in the 1990s
5 The Lombard Club vs. competition economics
6 Conclusion and outlook
Bibliography
List of figures
Figure 1: Interactions in the case of mergers/cooperations (own presentation based on Hellenkamp, 2015; Pfingsten, 2012; Alt et al., 2009)
Figure 2: Competitive forces in the banking market (own presentation based on Stoess, 2008; Thießen, 2011; Böhnke and Rolfes, 2014)
List of tables
Table 1: Competition (Mankiw, 2016)
Table 2: Definition sets of the competition (Knieps, 2008)
Table 3: Horizontal examples of restriction of competition (own presentation based on Kapp, 2018; Bühler and Jäger, 2002)
Table 4: Examples of vertical restraints of competition (own presentation based on Bofinger, 2015; Kapp, 2018)
Table 5: Examples of vertical restraints of competition (own presentation based on Kapp, 2018; Bühler and Jäger, 2002; Bofinger, 2015)
Table 6: Example for the product market (Kapp, 2018, p. 112)
Table 7: Criteria for defining the product market (Kapp, 2018, p. 113)
Table 8: Criteria for defining the geographic market (Kapp, 2018, p. 114)
Table 9: Characteristics of a superior market position (own presentation based on Mankiw, 2016; Bester, 2017)
Table 10: Offences of abuse (own presentation based on Mankiw, 2016; Knieps, 2008; Bester, 2017) 17
1 Introduction
"European Commission investigates loan syndication. ...] The European Commission has announced an investigation into loan syndications. The Commission will investigate whether banks are infringing antitrust rules when lending jointly. The financial sector and especially loan consortia have recently come under increasing scrutiny by the competition authorities. Market participants should be prepared for the possibility of antitrust investigations and minimise potential risks. ...] The Commission has not provided any concrete reason why loan syndications have now attracted its attention. However, the financial sector has recently come under increasing scrutiny by antitrust authorities. [...] In December 2016, a number of banks were fined for exchanging competitively sensitive information on their EURIBOR positions and strategies via chat rooms and instant messaging services, according to the Commission. ...] The decision essentially sanctioned an exchange of information between banks on intended interest rates, margins and, in some cases, charges as a breach of the European and UK antitrust rules. (Wiedmann, 2016, p. 54-56)
"A prominent American law firm is preparing a lawsuit against several German banks. They are alleged to have ripped off commercial enterprises by fixing prices. According to a report in the newspaper Bild am Sonntag, the American law firm Hausfeld is preparing actions for damages in the billions against German banks. Savings banks, Volksbanken and private institutions such as Deutsche Bank are affected. According to the report, the financial institutions are accused of illegal cartel agreements, which for years are said to have led to excessive fees when paying with RC cards. (FAZ, 08.01.2017, no page ).
"Record fine for Austrian "Lombard Club". Competition Commissioner Mario Monti has imposed a fine totalling €124.46 million on eight Austrian banks. Apparently their general managers had been coordinating their interest rates and prices for years. Until searches by EU investigators in June 1998, they went to the Hotel Bristol on the Innere Ring in Vienna. Once a month the Directors-General of the main Austrian banks met there. They discussed deposit rates, lending rates, charges, money transfers and export financing. According to Mr Monti, the so-called "Lombard Club" is one of the most shocking cartels in the history of the EU. According to the Commission's report, the cartel was already operating before Austria's accession to the EU in 1995 and lasted until June 1998". (Spiegel, 11.06.2002, no. S. )
Many reports are similar to this about banks that cooperate illegally, both nationally and internationally - illegally with regard to the violation of competition law. The main task of competition policy is to shape and guarantee a functioning and independent competition. On the one hand, competition should be subject to market-based incentives - to direct and control itself. On the other hand, competition should ensure that market participants are not unduly restricted in their decisions.
The legal framework for these measures in competition policy (in Austria and in the EU) is primarily regulated by the Act against Restraints of Competition (GWB). This law aims on the one hand to provide legal support for and thus preserve the structures of competition, but on the other hand also to prevent restrictive measures and behaviour by market participants. The so-called fight against cartels is available as an instrument for the behaviour which distorts competition, as are abuse control and merger control. The Bundeskartellamt is the institution responsible for the application and enforcement of these regulations for these restrictive practices. For the EU level, which also has a significant national impact on the EU countries, the Treaty on the Functioning of the European Union (TFEU) is the relevant legal directive in Art. 101, for abuse control at EU level Art. 102 TFEU. The Directorate General for Competition is initially responsible for the application and enforcement of antitrust law within the EU - between EU partner countries. It works closely with the competent authorities in the EU countries. This cooperation is becoming more and more intensive and is considered to be extremely necessary. This is because the forms and opportunities for cooperation give rise to unequal competition in the financial sector, which not only distorts competition in this area - these cooperations are expanding into cartels that dominate and dominate the financial market, and thus also have a subjective influence. This influence is not to the advantage of the consumer (which necessarily includes the state authority), but it restricts the consumer enormously in his decisions and he has no choice of differentiation. As a result, these cartel formations can influence a functioning market economy in such a way that it can no longer act independently. These developments are primarily to be discovered and eliminated (Kapp, 2018).
Thus, this paper deals with cartels with a focus on the banking sector. This will be explained or examined using the case study of the Lombard Club (banking cartel in Austria around 1995).
The second chapter uses industrial economics to provide the basis for understanding restrictions of competition, as well as cartels, supplier concentration, barriers to entry and their effects on the market.
In the third chapter, this market, which is imperfect because of betting restrictions, is examined and analysed more specifically for the banking sector. Here the restrictive cooperation between banks and its effects on the market are described.
The fourth chapter examines the Austrian situation in the 1990s (beginning of cartel formations and cartel agreements (including the formation of the Lombard Club). Here the situation on the financial market in 1990 is analysed. Furthermore, statements are made on competition and market concentration. The theories developed previously are used as a basis for this.
The fifth chapter focuses on the Lombard Club and its structures and facts about the cartel. It analyses the distortive measures of the so-called Club of Bankers in Austria in order to show how the measures have affected the Austrian banking market. The theoretical foundations previously elaborated will also serve as a basic understanding in this context.
The sixth chapter provides a summary of this topic and a conclusion with an outlook on the cartel situation in Austria and the EU.
2 Theoretical foundations of competition economics
In order to ensure competition among suppliers, at least three basic regulatory frameworks must be in place: property rights, rights of action and rights of disposal. Property rights are particularly important in this context, as they allow goods to be exchanged in one's own name, to be increased and brought into competition for profit - thus creating an incentive to stabilise and increase this ownership. Rights of action are economic framework conditions which enable competition, the market, to carry out, order and control certain activities in accordance with the rule of law. The same applies to rights of disposal, which allow market players, for example, to establish certain economic relationships and to underpin these with contractual rights in order to carry out legally supported economic activities (Knieps, 2008). In this context, Knieps (2008) emphasises that regulatory rules of the game must be permanently in place in order to guarantee a certain legal certainty in the market. In this context, the actors in competition should be granted freedom of contract and free market access with goods that may compete.
In the following, we will now outline the main focus of competition economics, i.e. the basic principles of competition law, in order to understand the situation of cartels in the competitive environment.
2.1 Focus on industrial and competitive economics
Industrial and competition economics essentially examines the competitive situation between the market (the place where economic events take place) and the enterprises (as market participants (demanders) and suppliers of goods and services). The companies that act as suppliers have usually incurred costs for their production factors, which they generate via the market. Consumers - also known as consumers - have been free to make their purchasing decisions - they weigh up their purchases on the basis of their income, they freely compare available prices and have intrinsic preferences. The total demand of a given market can be derived from all the purchasing decisions of the individual market participants. In summary, an industry or even a specific market can be described by suppliers, their production costs and market demand consumption (Mankiw, 2016).
The primary theory of an industrial and competitive economy seeks to describe the market in a model way in order to simplify the interactions in this market. The model should describe the behaviour of the market participants, whether it is rational or irrational in certain situations, and it assumes a profit orientation of the participants. For these analyses, equilibrium concepts are used to better identify and explain the market outcome. Here, partial models are theoretically abstracted in the focus area (Mankiw, 2016). These abstractions can be, for example, competitive behaviour in markets with monopoly positions - or oligopoly markets - or markets in which some cartel formations attempt to influence the market (Mankiw, 2016). This market behaviour and the corresponding market observations, as well as the strategic behaviour of market participants, are topics of industrial/competitive economics and have here the interface to business administration.
The other core of the industrial and competitive economy is seen in the consideration of markets with incomplete competition. Here, the mechanisms of perfect competition, as a theoretical reference case, are compared with imperfect markets in order to make the differences clearly visible (Bofinger, 2015). It is clear that the perfect market with its rules can only be a reality for a small number of markets. In theory, a perfect market/competition reflects the efficient market outcome. However, no external problem effects in the consumption behaviour of the participants or even in production should occur. These external problem effects can have a more influential effect on the allocation mechanisms of a market (Bofinger, 2015).
The activation of competition policy is appropriate when, due to imperfect competition, no market outcome can be expected from an efficiency point of view. These results from industrial and competition economics are interesting, among other things, because they play an important role in state regulation/impact on companies. For example, the state side could give decisive reasons for tax assessments and measures on the companies, and accordingly have a steering and controlling effect on the incomplete competitive market. Cartel formation and its effects on market activity (supplier behaviour and consumer behaviour) play a special role here - as do competitive behaviour (suppliers to each other) (Bofinger, 2015).
2.2 Main features of competition law
What is competition? This question is not clearly answered in the literature. In the following a few approaches to answer the definition are presented. This question is generally of little importance to the courts - they deal with the economic or commercial law content of this topic, namely with the questions: When does a restriction of competition actually exist? How can it be identified and to what extent does it influence competition? Practice divides this restriction of competition into horizontal and vertical ones (Woeckener, 2014). These two classifications have correspondingly different effects on the market, participants and general competition. Cartel law issues have to take into account and include legal regulations in Austrian as well as in European cartel law, thus these issues are very extensive in the international cartel area (Woeckener, 2014). Antitrust law deals with the restriction/restriction of competitive behaviour; the concept of competition is therefore still disputed today (Woeckener, 2014).
The following is a current understanding of competition.
Table 1: Competition (Mankiw, 2016)
Abbildung in dieser Leseprobe nicht enthalten
The result is that competition is a fluid process that does not allow for a static state - that is, a market where several suppliers and several customers act freely, acting according to rules, while protecting the weaker player. Similarly, cooperation between companies, the market power of individual companies and the resulting restrictions on freedom of action should be assessed on a case-by-case basis and not in advance as bad (Blum, 2006).
These definitional approaches can be expanded in terms of their objectives/functions (cf. table below):
Table 2: Definition sets of the competition (Knieps, 2008)
Abbildung in dieser Leseprobe nicht enthalten
The role of competition policy is therefore to ensure that the competition process functions properly. On the one hand, it should support competition as a market economy incentive, guidance and control instrument and, on the other hand, it must ensure that the decision-making scope of economic agents is not unduly restricted. In Austria and in the EU, the Monopolies Commission is an independent advisory body to the Federal Government and the legislative bodies in this task. The Monopolies Commission publishes a main report every two years. This report sets out the Commission's position on the development of competition and on current competition policy issues. In addition, it prepares special reports at its own discretion, at the special request of the Federal Government and in the procedure for ministerial authorisation (Minister of Economics) of mergers (Kapp, 2018).
The legal framework for competition policy in Austria, Germany and the EU is mainly governed by the Act against Restraints of Competition (GWB). This serves to maintain competitive structures and prevent restrictive behaviour by companies. The instruments available for this purpose are the fight against cartels, abuse control and merger control (Kapp, 2018). The Bundeskartellamt is responsible for the application and enforcement of these laws. At European level the Treaty on the Functioning of the EU (TFEU) regulates the fight against cartels (Article 101 TFEU) and abuse control (Article 102 TFEU). Merger control (ECMR) is governed at European level by the Merger Regulation. Within the European Commission, the Directorate General for Competition is primarily responsible for the enforcement of these competition rules. It works closely with the competent authorities in the EU countries. The provisions of the ARC and the TFEU are largely coordinated and so the Bundeskartellamt applies them in addition to the provisions of the ARC when trade between Member States is affected (Kapp, 2018).
The ban on cartels is enshrined in Section 1 of the ARC. This law clearly stipulates, in principle, that companies and associations may not enter into any agreements which have the effect of hindering/restricting or influencing competition. Cartels are usually formed to increase a company's profits - and not in the interests of customers, suppliers or competitors. For example, cartels can be agreements relating to product prices on the market, certain business conditions, production volume or sales territories or agreements concerning certain customer relations. These agreements restrict the other decision-making channels of other market participants to their disadvantage. Competition law also lists a number of regulations concerning the dominant position of companies in the market - regulated by § 18 GWB. This means that these companies do not have any significant competitors in the market and are therefore in a dominant position and therefore almost without competition. Basic criteria for such a dominant position can be market share, financial power and customer contracts - but it could also be a dominant market position with regard to the very poor chances of market entry of competitors, who thereby keep their own turnover and customer relations very high. In Section 18 GWB, market dominance is focused on the size of the company and the supplier concentration of the respective market. It is thus presumed that a company with a market share of approx. 40% has a dominant position (Kapp, 2018; Wied-Nebbeling, 2009).
The core task of merger control is to control and eliminate this dominant position of companies. This is regulated in § 36 GWB. However, the merger can be liberalised if it is shown that the merger could lead to an improvement in competition or if the advantages of the merger outweigh the disadvantages of market dominance (this situation can be achieved by ministerial authorisation if macroeconomic benefits arise from the merger) (Kapp, 2018; Blum, 2006). The task of merger control is thus to prevent a company from acquiring a dominant position. By contrast, the task of abuse control/abuse supervision is to control these companies and their behaviour on the market. This involves targeting certain behaviour of companies in the market which creates market power and impedes, influences and even discriminates against other companies in the market. In this context, dominance on the market has to be proven - and the specific market has to be defined. Accordingly, the question of how much and which suppliers actually compete on this market and how many substitution possibilities exist for consumers to substitute certain products (Woeckener, 2009).
If abuse is established, as is the situation of exploitative abuse, a so-called competitive reference situation must be established which determines the dimension of the abuse. There is a kind of comparative market concept which, for example, identifies the excessive prices of a company and compares them with those of other companies in the market in order to establish the dominant situation or the abuse. This comparative concept can usually never be precisely determined or proven (Kapp, 2018).
2.3 Restrictions of competition through agreements, decisions and concerted practices by companies
The ban on cartels is at the heart of antitrust law. Agreements, concerted decisions and concerted behaviour by companies which restrict competition are prohibited and must be prohibited under this law. Price agreements, bid-rigging agreements, quota agreements, customer/area agreements are called hardcore cartels - these cartels are exempted from exemptions (Bester, 2017; Hecht, 2011).
2.3.1 Cartel by agreement between undertakings
Through agreements/contracts, several companies commit themselves to do or refrain from doing something on the market by engaging in certain behaviour that hinders other market participants. The ban on cartels already includes the prohibition to conclude such agreements; the implementation of these agreements is not relevant. These agreements can be concluded in writing, orally or even tacitly. An agreement presupposes the mutual, mutually corresponding declaration of intent of the parties (concurrence of wills). In reality, it will not be possible, or hardly possible, to prove concerted behaviour. This in turn has little significance for Section 1 of the ARC or Art. 101 (1) TFEU, as these agreement provisions are clearly presented and covered in this Act (Bester, 2017; Hecht, 2011).
2.3.2 Cartel by corporate decision
The decisions are binding on the companies - the relevant company bodies are bound by them. The decision does not have to be legally binding for the ban on cartels to be considered - all that matters is that the members of the decision are bound by it and act accordingly - this circumstance is expressly prohibited under cartel law. In this respect, the decisions differ from the agreements that these are dependent on the majority decisions of the companies. According to the Bundeskartellamt and the EU view it is sufficient that the companies have a common will (even without a formal decision) and that they put this will into concrete terms (Bester, 2017; Hecht, 2011).
2.3.3 Cartel through concerted behaviour by companies
Antitrust law also prohibits companies from gaining a market advantage through concerted behaviour. Concerted behaviour does not mean having an agreement as its basis. So-called parallel behaviour is usually not sufficient under antitrust law - this would be tantamount to reactive behaviour towards other market participants. It is therefore difficult to prove in reality that such concerted market behaviour, which leads to distortions of competition, exists. Clearly co-ordinated market behaviour and practical co-operation to eliminate certain market risks are circumstantial evidence in the sense of the antitrust rules and lead to concerted behaviour. It is therefore important to reduce the risk to one's own company by co-ordinating with other companies. Although this concerted behaviour between companies does not constitute a commitment, the planning of such coordination alone is already prohibited under the ban on cartels (Bester, 2007; Hecht, 2011).
2.4 Cartels through horizontal restrictions of competition
Horizontal restraints are all restrictions of competition in horizontal agreements between competitors, i.e. companies at the same level of production or distribution. In practice, there are many such agreements containing restrictions of competition (see the examples in the table below).
Table 3: Horizontal examples of restriction of competition (own presentation based on Kapp, 2018; Bühler and Jäger, 2002)
Abbildung in dieser Leseprobe nicht enthalten
A distinction must be made between restrictions of competition which are unlawful outright (so-called "hardcore cartels") and those whose unlawfulness can only be established after a concrete examination of the individual case. Whereas in the case of hardcore cartels justification is regularly ruled out because of their generally acknowledged harmful effects, the latter cases are essentially ambivalent, as they often contain both pro-competitive and restrictive elements. An evaluative balancing test must therefore be applied. The competition effects of such agreements must be analysed in detail. In a normal assessment of cooperation between market participants, in particular the application of the exemption rule of Article 101(3) TFEU, the Commission's Horizontal Guidelines must be taken into account in addition to case law. These cover a wide range of different forms of horizontal agreements (Kapp, 2018; Bühler and Jäger, 2002; Bofinger, 2015).
2.5 Cartel formation through vertical restraints of competition
Vertical agreements are agreements between companies which operate at different levels of production or distribution, i.e. which are not normally competitors. Such agreements may give rise to vertical restraints of competition if they impose restrictions on the supplier or the buyer, such as an obligation on the buyer not to purchase competing brands or an obligation on the seller to supply only one particular buyer (exclusive distribution). Vertical agreements containing restrictive clauses are common in practice, as the table below shows.
Table 4: Examples of vertical restraints of competition (own presentation based on Bofinger, 2015; Kapp, 2018)
Abbildung in dieser Leseprobe nicht enthalten
Whereas in the past only fixed prices and conditions were prohibited under German cartel law and all other distribution agreements (non-price fixing) were only subject to abuse control and thus not to an automatic prohibition, since 2005 vertical agreements have also been subject to the general prohibition of cartels in German, Austrian and EU law under Article 101 (1) TFEU and Section 1 GWB. Vertical agreements are generally ambivalent in nature (Kapp, 2018; Bühler and Jäger, 2002; Bofinger, 2015):
- They can impede competition by making access to procurement or sales markets more difficult, thereby excluding actual or potential competitors.
- They can stimulate competition, for example by facilitating or even enabling the establishment of a sales organisation for (newly developed) products. This is particularly true for newcomers with a view to entering a new market. Thus, vertical restraints, which are necessary for the development of a new product market or sales area, are in principle to be assessed positively. Although they guarantee dealers higher profits, they create special incentives for intensive market development. For example, vertical restraints often have the tendency to restrict competition between companies at subsequent economic levels within a distribution system (so-called intra-brand competition) in order to strengthen the position of the manufacturer in competition with its competitors (so-called inter-brand competition).
Table 5: Examples of vertical restraints of competition (own presentation based on Kapp, 2018; Bühler and Jäger, 2002; Bofinger, 2015)
Abbildung in dieser Leseprobe nicht enthalten
Due to the ambivalence described above, the effects of vertical restraints and the resulting antitrust assessments can often only be assessed on the basis of the circumstances of the individual case. The Commission has also recently started to apply a more economic approach to the assessment of vertical restraints, focusing on the effects of the agreements on the market concerned. It has thus moved away from a previously more "conceptual" definition of an unlawful restriction of competition (Kapp, 2018; Bühler and Jäger, 2002; Bofinger, 2015).
2.6 Restrictions of competition through supplier concentration, merger, entry barriers
A core task of antitrust law is the prohibition of abuse of a dominant position of a company. This is based on the assumption of unilateral conduct by dominant companies which restricts market participants due to their competitive behaviour. To establish dominance, the relevant market must first be defined. The market share within this definition must be examined. According to the presumption rules of German and Austrian competition law, a dominant position is assumed if the market share is at least 40 percent. Even dominant companies are initially allowed to participate in competition without restriction. Under competition law it is only prohibited to abuse this dominant position. Various types of abuse have developed in this sense: exclusionary, discriminatory, exploitative, structural, and incitement to advantage (Bester, 2017; Schenk, 2017).
2.6.1 Prohibition of abuse
Sections 18-20 GWB and Art. 102 TFEU regulate abuse control. These provisions deal with unilateral conduct by companies which abusively influence and hinder the market to the detriment of competitors. German, Austrian and EU law also subjects competitors with relative or even superior market power to abuse control. Abuse control means that companies are controlled here which, through their unilateral behaviour, have a strong negative impact on competition for their own positive advantage. However, abuse control does not prohibit the existence of market dominance or market power itself or its acquisition through internal company growth, whereas the creation of market dominance through external growth is subject to merger control. Therefore, only the exploitation of a dominant or powerful market position in an anti-competitive manner is prohibited. The dominant position always relates to a specific market. The prohibition of abuse by dominant companies must therefore be examined in three stages: First, the market must be delineated and defined, then it must be verified whether the company in question is even dominant in the market, and finally the abuse in this examined market by the company in question must be proven (Bester, 2017; Schenk, 2017).
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