Euribor and the limits of antitrust
The European Commission is investigating a suspected banking industry cartel, one of the many consequences of the opening of the London Interbank Offered Rate (Libor) and Euro Interbank Offered Rate (Euribor) Pandora's box.
The European Commission is investigating a suspected banking industry cartel, one of the many consequences of the opening of the London Interbank Offered Rate (Libor) and Euro Interbank Offered Rate (Euribor) Pandora’s box. Antitrust enforcement is one of the most important tools to foster economic well being and this investigation is sending the right signal: the Commission is ready to fight those that breach the law. But the Euribor case alone is unlikely to help to prevent future scandals and restore citizens’ trust in markets. The proposal of the European Commission to limit self-regulation and centralise benchmark supervision probably stems from similar considerations.
Competition policy protects consumers and when a cartel is established a negative effect on consumers is presumed. In the Euribor case, virtually everybody can directly or indirectly be affected: a householder with a mortgage, a small firm asking for a loan, a public entity buying ‘swaps’, a consumer using her credit card, an investor buying derivatives for millions of euros. These customers enter into a deal with banks. But the price of that deal is set afterwards through anchoring to an independent benchmark, the Euribor. The Euribor is the average rate at which a number of banks believe prime credits would be exchanged. Naturally, it would be rather silly to enter into such a deal if you know that your counterpart will be able to adjust the price to its advantage at a later stage.
The Euribor case is about whether and to what extent such an ex-post manipulation happened via a network of traders from different banks. The European Commission’s antitrust chief, Joaquin Almunia, has repeatedly said that the Commission will take a tough stance if allegations are confirmed. Almunia does not need to show that banks explicitly coordinated. To identify a breach of European competition law, it may be enough to show that the platform used to define the benchmark allowed for extensive information sharing among competitors and created sufficient incentives to align banks’ submissions and lead to a concerted definition of Euribor rates.
It will not help the banks’ case to show that shareholders were not aware of traders’ wrongdoing. As the recent decision against Microsoft shows, the European Commission does not consider lack of internal control to be a mitigating factor. Microsoft attributed its non-compliance to the promise of offering a choice of Web-browsers to its users to a “technical error”. That did not spare the company from a €561 million fine.
Fines should account for the probability that a cartel will be discovered. Since this probability is low, researchers suggest that fines should be six to seven times higher than the expected gains yielded by the infringement in order to ensure deterrence. In the case of Euribor, the potential benefits are large so that fines would have to be huge. But in practice such fines are never levied. Often, fines do not even match the excess profits. One of the reasons for this striking outcome is that the Commission will not impose a fine that would jeopardise the economic viability of the infringer. Empirical analysis shows that during the crisis, the Commission considerably reduced its fines. Companies are allowed to claim that they are ‘unable to pay’. If they truly are, the fine has to be reduced.
A fine in the Euribor case that would offset the profits made from the infringement, and would achieve the deterrent level suggested by economic theory, would simply be unrealistic. Banks would not be able to pay it. And pushing a bank out of the market because of regulatory sanctions would do more harm than good to the economy.
Ex-post enforcement is good, but in this case it is certainly not enough. Future collusion needs to be prevented through tighter regulatory control and the use of data-based estimation to complement banks’ subjective contributions. More generally, more transparency is needed. Without bold moves from EU and national legislators and more stringent supervision, Euribor-style scandals could happen again.
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