Banking Regulation and Competition Law

Banking Regulation and Competition Law
Duisenberg School of Finance

Final exam
6 January 2014
This is an open book exam. Below you find three questions, each of which you are invited to
answer in essay style. The various sub-questions are meant to help you structure your essay.
Please read the entire question first and think about it, before answering. Manage your time
carefully. Enjoy!
Question 1 (50 points). Last December, the European Commission reached a settlement with
eight financial institutions that were found to have participated in a cartel related to interest
rate derivatives priced on the basis of the LIBOR and the EURIBOR (see the enclosed press
release from the European Commission).
a. Explain how the EURIBOR and the LIBOR used to be set.
b. How are the interest rate derivatives that the European Commission focuses on in its
decision related to the EURIBOR and the LIBOR rates?
Several market oversight authorities have published evidence of interbank coordination in the
EURIBOR and LIBOR rate submissions. Enclosed as an example is an excerpt of the
statement of facts to the settlement between the US Department of Justice (US DoJ) and the
Dutch Rabobank (recitals 69 to 80).
c. Mark (and/or cite) some passages in this text that contain explicit collusive language.
Can you understand that this kind of evidence raises suspicion of a cartel with the
competition authorities? Explain your answer, including with reference to Article 101
TFEU and some characteristics of known cartels.
d. The behavior of which of the cartels found by the European Commission, if any, does
the interbank coordination established in the US DoJ document comes closest to you
think? Explain your answer.
In his statement quoted in the enclosed European Commissions press release, Commissioner
Almunia emphasizes that this decision is in addition to manipulation about: collusion
between banks who are supposed to be competing with each other.
e. In what sense, do you think, were the panel banks expected to compete in the fixing
of the EURIBOR and LIBOR? Explain your answer extensively, also relating the
rates to the derivatives products concerned.
1
The European Commissions decisions were adopted under the Commissions cartel
settlement procedure.
f. Explain briefly what that procedure entails. What benefits are there for the
Commission in particular? Explain your answers.
Not all financial institutions under this cartel investigation agreed to be included in the
settlements. Together with two other banks did JPMorgan opt out (see the enclosed
newspaper article from Bloomberg).
g. Explain what the consequences are for the European Commission of this decision by
JPMorgan.
h. How, do you think, will this case further develop? Motivate you predictions.
Question 2 (25 points). In its investigations into possible abuse of dominance by Google, the
European Commission is trying out a new enforcement tool: market testing proposed
commitments during its negotiations with Google. The Commission market tested an initial
proposal by Google last April, which according to Commissioner Almunia led to
improvements in the Fall, which were then tested again (see his enclosed speech before the
Parliament). Just before Christmas, the Commission decided to reject Googles proposed
changes after all (see the enclosed newspaper article from The Guardian).
a. In what sense is Google arguably dominant? How in essence does Google allegedly
abuse that dominant position? Explain your answers.
b. Why would the market testing process be suitable to the Google case, you think?
Motivate your answer critically.
c. How, do you think, will this case further develop? Motivate you predictions.
Question 3 (15 points). Commentators have found some of the causes of the latest financial
crisis in problems with competition in the banking sector. One such problem is that particular
banks have become too big to fail, meaning that in the event of bankruptcy, the downfall of
these financial-services companies would cause such extensive negative externalities, that
governments simply cannot let that happen and will need to provide support in the form of
State aid, or otherwise whatever the costs. An overhaul of financial regulation may be
needed to address this and other problems.
a. Explain how banks may alter their behavior if they can expect to be bailed out by
State aid should they fall into financial distress.
In the State Aid Action Plan (SAAP, 2005) project, the European Commission seems to want
to introduce more possibilities for allowing State aid that effectively addresses the correction
of market failures as long as such aid "distorts competition to the least possible extent."
One could argue that the financial sector suffers from some structural market failures, related
to asymmetric information, the existence of positive externalities that may naturally create
large banks with market power, and the risk of the kind of negative externalities in case of
failure mentioned above.
b. Do you think that a market-failure defense of State aid to banks in these times of
distress is appropriate? Explain your answer.

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