Serious restrictions to competition can result from the merger of commercial banks

Increased concentration in the banking market
Vital to reduce entry barriers and the cost of switching banks


BankalogoThe Competition Authority has today issued a consultation paper on competition in the banking market.The Competition Authority wishes thereby to encourage financial undertakings and the authorities to pay attention to competition issues in policy formulations for the financial market, as well as to present its views on bank mergers.

One of the factors that will play a key role in the resurrection of the Icelandic business sector is the manner in which financial activities are conducted in Iceland. Active competition on the financial market is particularly important for both the business sector and consumers. Such competition supports industrial development and the competitive ability of Icelandic companies.

The Competition Authority believes that policy formulations for the financial markets must prevent homogeneity in structure and mentality and must create an environment  for an active market and innovation in the sector. The Competition Authority is wary of larger commercial banks buying or taking over smaller financial undertakings and of creating a comfortable market with two or three large banks that are free from the risk of external competition.This type of market is generally detrimental to the public and the business sector.

The principal conclusions of the report are as follows:

  • Concentration on the banking market has increased substantially since 2008, with reductions in the number of financial undertakings and with the larger banks taking over deposits in savings banks. The calculated Herfindahl-Hirschman Index (HHI) is just under 2,700 points at present. Before the collapse, the Index did not reach 2,000 points.Such great concentration creates the risk of competition restrictions involving the co-ordinated behaviour of competitors. 
  • There are considerable entry barriers to the banking market, and it is difficult for consumers to switch banks. The Competition Authority is of the opinion that advantage should be taken of the opportunities that the reshuffling since the collapse provides to make access to the banking market easier and to decrease the cost of customers transferring between banks. This will increase competition and enable smaller competitors to grow stronger.
  • The banking system is too expensive given its current scope, and rationalisation is therefore necessary. The operating costs of Arion Bank, Íslandsbanki and Landsbankinn rose by ISK 7.5bn between 2009 and 2010, or by approximately 12% in real terms.The number of employees increased by 200 over the same period.
  • Rationalisation must be achieved by means other than mergers. The Competition Authority is of the opinion that extremely serious competition problems can result from the merger of commercial banks, at least in the instances where one or more of the larger banks is party to such merger. In this respect, it is right to point out that the rationalisation which may occur in a merger is a hypothetical rationalisation and not a certainty. The majority of scientific articles that have been written about bank mergers indicate that they provide insignificant rationalisation.
  • It is vital to keep in mind that circumstances on financial markets can change quickly, as experience has shown. The financial market is subject to a great deal of uncertainty and currency restrictions. Moreover, the financial strength of the banks is not yet known. Furthermore, there is the possibility that there will be radical changes made to the arrangement of monetary issues and that these may completely alter the market.

Pall_Gunnar_Pallsson_img03Páll Gunnar Pálsson, Director General of the Competition Authority:

“It is clear to all parties that it is necessary to make the banking system more efficient. The problem lies in the manner in which it should be done. Research has shown that bank mergers are hypothetical rationalisations and not necessarily certain. The core of the matter is that bank managers must first and foremost address home-grown problems.”

The Competition Authority requests the submission of the views of stakeholders and other interested parties before 31 May 2011.

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