Originally published November 2009

Keywords: antitrust authorities, ING Group, European Commission, domestic regulation

The Dutch financial conglomerate ING Group, under pressure from the European Commission, recently announced plans to accelerate the sale of its insurance operations and its internet banking business in the United States. It also agreed to stop making further acquisitions. Many see this as the first of several likely examples of banks being cut in size because they are considered to be 'too big'. ING Group's chief executive put a different spin on the development by stating that "the costs of complexity [in the combination of a diversified portfolio of businesses under one roof] now outweigh the advantages we once saw".

Becoming 'too big' has been a recurring concern for at least the last 100 years, and the nature of corporations and markets means that this concern will not go away. Antitrust law could cap the growth of corporations, or even reduce them if considered 'too big'. In terms of whether or not antitrust regulators would intervene, the fact is that they have intervened.

Too big is an old concern. Some very large corporations in the US grew still larger and by the 1880s there was strong public feeling that these 'trusts' were too big and too powerful. A result was the Sherman Act 1890 which remains one of the principle competition statutes in the US. Senator John Sherman commented at the time: "The popular mind is agitated with problems that may disturb social order, and among them all none is more threatening than the inequality of condition, of wealth, and opportunity that has grown within a single generation out of the concentration of capital into vast combinations to control production and trade and to break down competition. These combinations already defy or control powerful transportation corporations and reach State authorities".

These thoughts are very similar to comments made over 100 years later in the summer of 2009 when the New York Times reported that, "...amid the wreckage of the gravest financial crisis since the Great Depression, bigness is one of our biggest problems. Major banks, the Detroit automakers, the financial basket case that is the American International Group...Policy makers fear companies like these are so enormous and so intertwined in the fabric of the economy...".

The views on why corporations get 'too big' have also not varied that much over time –profit. In a testimony to the US Congress, Simon Johnson, Peterson Institute for International Economics, identified wealth was an important element to understand the financial crises, stating that " jobs in finance became more prestigious, people in finance became more prestigious, and the cult of finance seeped into the culture at large, through works like Liar's Poker, Barbarians at the Gate, Wall Street, and Bonfire of the Vanities. Even the convicted criminals, like Michael Milken and Ivan Boesky, became larger than life. In a country that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country as a whole – and that the winners in the financial sector knew better what was good for America than career civil servants in Washington".

How do you measure 'too big'?

There is no helpful definition of what constitutes 'too big', and so no glass ceiling that corporations might hit. The schoolbook on microeconomics teaching of diseconomies of scale, limited as it commonly is to consideration of costs, production and capacity has not been an element of the discussion.

Market share is commonly the first and last reference point for considering the size of a business. In the banking sector, for example, banks clearly got a lot bigger in the US. In 1990, the 25 largest banking organisations held approximately 22 percent of industry assets; by the end of 1998, this figure had increased by more than two-thirds to approximately 54 percent, according to the Federal Deposit Insurance Corporation. Until recently, the world's three largest banks were headquartered in the US. Today the world's three largest banks are all headquartered in China, with the largest being 250 percent larger than the largest US headquartered bank.

Even in antitrust law, which commonly uses market share tests, it is very rare that there are solid ceilings. Germany, for example, has the threshold that a presumption of dominance arises, and thus a proposed merger would be blocked, for example if up to five corporations combined account for at least two-thirds of the market. However, these presumptions are rebuttable and indeed are often rebutted in practice. One of the reasons for this is that one size does not fit all, so a single and simple rule of what is too big would likely create too many false positives – namely, regulatory interference when there would actually be no concern to address.

Domestic regulation of global corporations is limited

A typical regulator is only able to consider the domestic business because that is the limit of its jurisdiction. For example, the UK's Financial Services Authority will have authority over a bank in relation to its licensed activities in offering services in or into the UK, but it will not have jurisdiction to control the bank's activities outside the UK. A consequence is that there is no single regulator that has the 'big picture'. This regulatory gap is one of the criticisms and lessons being drawn by regulators in relation to the global regulatory regimes for the banking sector.

Antitrust authorities do not face such limitations

Competition laws have certain characteristics that strongly suggest that they are not as limited as a typical sectoral regulator in addressing the 'too big' concern. There are five reasons for this, as follows.

First, under competition law's "effects doctrine" any action by one or more corporations which has an anticompetitive effect in, for example the EU, can be investigated and prosecuted by the EU's competition authority, irrespectively of where those corporations are based, where the act occurs and regardless of whether the effect was intended or is a direct or indirect consequence of the act.

Second, competition laws are normally expressed as relatively broad principles, for example, "abuse of a dominant position" making it difficult for a corporation to work around the rule and allowing flexibility in dealing with leading-edge concerns.

Third, competition authorities have focused on the size of a corporation, as a proxy for market power. For example, under EU competition law, for a corporation to be deemed to be holding a dominant position, not only means that the usual tools to conduct business may be potentially restricted or prevented from being used, but such an entity 'has a special responsibility not to allow its conduct to impair undistorted competition'. More potent as a tool for intervention, competition law has a concept called collective dominance, which means that two or more independent corporations could be deemed to hold (collectively) a dominant position, even if none of them does so on an individual basis and even though each corporation's market share is relatively small.

Fourth, in the EU a corporation that receives State funding will very likely be considered to have received State Aid, which has to be considered under competition rules so that it will not confer the recipient corporation a competitive benefit compared to others. Fifth, competition law has an ability to control the growth of a corporation by blocking proposed mergers.

But would the competition authorities intervene?

All those corporations that have received State Aid under EU rules have surrendered themselves to the application of competition law. The changes that are being forced on banks and others as a result show the power of the competition rules in the EU – there appears to be nothing the competition authorities cannot do to make changes that are deemed necessary. In June 2009 the EU's Competition Commissioner, Neelie Kroes, said there was a "strong likelihood of significant divestments" required for both The Royal Bank of Scotland and the Lloyds Banking Group, both partly nationalised by the UK.

In the US application of competition law to corporations thought to be too big appears to be more limited because the prevailing view is that the law would need to be amended to apply. However, the DOJ is now applying regulatory pressure that can be very effective in causing change. Such a reaction could be predicted. What cannot be predicted is whether or not competition rules will be applied to create a new bar to corporations because they are deemed to be 'too big to fail'.

Once the hurricane has clearly passed and storm clouds are cleared, the question is whether governments and regulators become taken over by new issues and concerns, or whether they will institutionally and proactively try to address the 'too big to fail' concern. A suggestion that has been made is to set up a committee, drawn from academia, industry, regulators and government, with the mandate to report on what changes, if any, should be made to try to address the old concern of 'too big to fail' by using realistic tools applicable to the modern world.

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