Book: The Economist - 2016-01-09

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Retail banking

Blunt elbows

There is less competition among banks than first meets the eye


HERE’S a puzzle: in bustling Manhattan, where bank branches abound, people pay much more for the privilege of stashing their cash than in sleepy Kansas. Greater competition should reduce charges and fees. Yet there is no sign of such a relationship. That is because much of the competition is phoney, according to a new working paper*.

Antitrust authorities typically gauge competition by looking at how many different banks operate in a given area. But the authors argue that this ignores the fact that a handful of big asset-management firms have large holdings in many of these “competing” banks (see chart). An investor who owns shares in two rival banks would naturally be reluctant for them to compete away profits. To please their shareholders, the banks might keep charges and fees high.

The authors calculate the extra degree of market concentration implied by American banks’ common ownership. In 2013 this additional concentration was so great that it would typically be associated with an increase of 11% in fees on current accounts, and a rise of 20% in the minimum balance at which banks stop levying fees. Where common ownership rose the most in 2002-13, charges were also most prone to rise.

These findings may seem implausible to those who see asset managers like Vanguard and BlackRock as purely passive investors. But even passive funds can be actively involved as shareholders. And firms may themselves decide not to compete in order to keep common owners happy. At any rate charges and thresholds crept steadily upwards during the 2000s, at the same time as index funds expanded their shareholdings in banks.

Banking is not the only industry in which the authors have found evidence that common ownership saps competition: a working paper published in March found that the concentration of ownership at airlines in America had boosted ticket prices by 3-5%. Common ownership has never really been on the radar of competition authorities. That may need to change.

*Ultimate Ownership and Bank Competition” by José Azar, Sahil Raina and Martin Schmalz

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