Note: ‘c.o.e.’ abbreviates conditions of existence and ‘manif.’ concrete manifestations.
Contents
Introduction
Division 1. The imposition of competition: a framework of prohibitive regulation of the enterprises’ market interaction
9§1 The state’s manifestation in competition policy: the engendering a particular mode of existence of the capitalist system
9§2 The imposition of competition: the fairy tale’s ‘free market’ turned into ‘unfree free markets’
9§3 The proclamation of moral economic norms
9§4 Execution of competition regulation as delegated to an ‘independent’ market authority: purification from conflict
Division 2. Constraints on the mode of competition and (potential) constraints on the mode of capital accumulation
9§5 Precluding a deflationary constellation: creeping inflation
9§6 The movement to oligopolies as entities being too big to fail and (potential) constraints on the mode of capital accumulation via its capping
Summary and conclusions
Appendix 9A. Too big banks: too big to fail and too big for supervisors
9A-1 Centralisation and concentration of capital within the banking sector, and characteristics of big banks
9A-2 Big banks: too big to know what is going on
9A-3 Socials cost of an encompassing banking crisis, and the temporary decrease in bank profit rates
List of figures chapter 9
Introduction
The previous chapter completed the grounding of the capitalist state vis-à-vis the capitalist economy. As with the last two chapters of Part One regarding the economy, Chapters 9–10 present the concrete manifestations of the state. These concrete manifestations are about the reproductive strength of the capitalist system, but also its vulnerabilities (General Appendix on Systematic Dialectics, section A§12).
This chapter presents the state’s concrete manifestation in its imposing a framework of constraints on the modes of market interaction of enterprises and banks, and of constraints on the outcomes of that interaction.
Division 1, which is a sequel to Chapter 4, surveys the state’s engagement in constraints of market interaction that is ‘conventionally’ regarded as ‘competition policy’ as encoded in competition law. It will be seen that the state’s rationale for such a legislative framework is rather ambiguous. In the form of ‘competition policy’ the state imposes on enterprises and banks its view about ‘proper’ competitive interaction.
Division 2 presents two main effects of market interaction on the market constellation, ones that when left unconstrained would generate vulnerabilities for the reproduction of the capitalist system. The first one regards the competitive constellation that would result in (potential) generalised price deflation (4D2) and the state’s response to it. This response takes the form of a monetary policy engendering ‘creeping inflation’.
The second vulnerability regards a phenomenon that was only thrown into relief with the emergence of the 2008 financial crisis, that is, entities, especially banks, that have grown ‘too big to fail’. The state’s response to this phenomenon is as yet (at the time of completing this book) insufficient, although the germ of an instrument more adequately dealing with it seems in the making. Even if such a (potential) instrument were to exist, its effective implementation would require big entities to break up into several smaller ones. This is highly conflicting as it puts in fact a penalty on the successful accumulation of capital.
The latter point is dealt with in a single section of Division 2. An appendix deals more extensively with its empirical background.
Scheme 9.1 presents the outline of this chapter.
Scheme 9.1
The imposition of competition (outline Chapter 9)
Legend
| .. |
concrete manifestation |
Division 1. The imposition of competition
This division sets out the state’s engagement in constraints of market interaction that is ‘conventionally’ regarded as ‘competition policy’ as encoded in competition law.
9§1 The state’s manifestation in competition policy: engendering a particular mode of existence of the capitalist system
The primary aim of enterprises is the production and accumulation of capital (Chapters 1–2). In achieving this, the particular form of market interaction is purely instrumental to enterprises (4§5). Thus competition, cartel formation and centralisation of capital are mere instrumental alternatives. (See Figure 9.2 for a recapitulation.)
With a framework of ‘competition law’ the state might be concerned to impose competitive market interaction. Such a framework is not obvious to the extent that non-competitive market behaviour does not interfere with, first, the production and accumulation of capital, and, second, the material existence of the state (7D1). The state’s entertainment of a framework of competition law seems rather the manifestation of a particular mode of existence of the capitalist system. Even so, it is a mode that – in a variety of forms – is ubiquitous among capitalist nations.
Figure 9.2
Recapitulation of the forms of market interaction as set out in Chapter 4
|
Forms of interaction |
Degree of rivalry (top: top rivalry) |
|
|---|---|---|
|
rivalry interaction |
competition† |
1a. deflationary price competition: resignation to rotating price-leadership (4D2) |
|
1b. inflationary ‘structural overcapacity competition’: resignation to rotating price-leadership (4D3) |
||
|
non-rivalry interaction‡ |
cartel formation |
2. tacit price-leadership (implicit cartel) (4D4)1 |
|
3. cartel (4D4) |
||
|
rivalry tending to non-rivalry interaction |
centralisation of capital |
4. oligopolisation (via merger or take-over): tacit or agreed price-leadership (4D5) |
|
annulment of interaction |
centralisation of capital |
5. monopolisation (via merger or take-over) (4D5) |
| † |
1a and 1b are alternative general constellations. 2–5 in particular sectors coexist with each of the general constellations in other sectors. |
| ‡ |
This layer (as based on stagnant innovation in a sector, 4§13) is a recurrently evanescent one, next being ‘replaced’ by new stagnant ones. |
9§2 The imposition of competition: the fairy tale’s ‘free market’ turned into ‘unfree free markets’
We have seen that the capitalist economy cannot stand on itself and requires the state for, so far, seven regulatory frameworks.2 In fact the capitalist ‘free market economy’ is a phantom that can only figure in fairy tales of so devised models (cf. 8§11, under 1). On top of these seven frameworks the state might engender a framework of pro-competitive legislation. However, the state’s rationale for such a framework is troublesome, because with it the state openly declares that the capitalist economy cannot stand on itself. (A major capitalist state promulgated this as early as 1890 with the USA Sherman Act of that year.)
If ‘competition’ as generated by the ‘free market’ were supposed to be inherent to the capitalist economy (the fairy tale that many entertain), then it is rather paradoxical that when the ‘free market’ is left to itself, this should lead to the evaporation of competition (cartels, and non-rivalry oligopolisation and monopolisation).
If, instead (or therefore), the state uses its voice to teach ‘free market’ enterprises what competition is or should be, this is paradoxical. In fact the state does teach enterprises, by imposing its view of competition on enterprises. Thus in the fairy tale jargon we seem to have unfree free markets.
With the regulation of competition the unity of the capitalist economy and state reaches its most concrete manifestation regarding the functioning of ordinary markets (that is, all markets apart from the labour and money markets).
In practice the field of ‘competition law’ is not about competition but rather about the prohibition of, so-called, ‘anti-competitive conduct’ (see amplifications 9§2-b and 9§2-c). This is quite far-reaching, as it limits property rights (6§10) and especially ‘free contract’ – ‘free contract’, that is, ‘free’ cartel agreements (now deemed ‘collusion’) and ‘free’ share purchase agreements in case of mergers and take-overs (those that would entail excessive market dominance).
9§2-a Amplification. A twofold fairy tale
Neoclassical general equilibrium theory is a fairy tale within a fairy tale. The first one is that it ignores even the first two frameworks and its consequences. Within that fairy tale it constructs a world of firms none of which has any market power. Rather more immanently, Blaug (2001) indicates that it is rather ironic to denote something that cannot exist (general equilibrium) as ‘perfect competition’. He argues how general equilibrium theory entertains an ‘end-state’ notion of competition in which rivalry has come to a rest, rather than a dynamic notion of competition as a process.
9§2-b Amplification. ‘Free competition’ – the EU’s objective of a non-defined goal
The European Union is an interesting case for the current matter, first, because it is predominantly an economic and monetary union, and second, because it started building its legislation from scratch. To begin with, it is one of the few state-like constellations that has warranted a free market economy in its ‘constitution’ (i.e. the Lisbon Treaty, as entered into force in 2009):3
‘… the activities of the Member States and the Union shall include … the adoption of an economic policy which is based on the close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.’
European Union, Treaty on European Union, art. 119, emphasis added4
This is quoted from the general part of the Lisbon Treaty. A second part, the ‘Treaty on the Functioning of the European Union’, contains six brief articles on competition (arts. 101–106 TFEU). It is remarkable – and indicative of the tricky problematic of the matter – that these articles abstain from outlining what constitutes ‘free competition’ (art. 119 TEU just quoted); instead these describe, in general terms, what it is not. Similarly, the European Commission abstains from setting out what free competition or even what competition is (Senate of the Netherlands 2014, p. 3).
Arts. 101–102 TFEU use normative qualifications such as ‘restriction or distortion’ of competition; ‘abuse’ of a dominant position; and ‘unfair’ purchase or selling prices or other trading conditions.
9§2-c Amplification. Prohibitive competition law
The duality of defining ‘competition’ versus ‘non-competition’ is expressed succinctly in an OECD ‘background paper’ by Schwalbe, Maier-Rigaud and Pisarkiewicz:
‘The role of competition law is to assure that effective competition prevails by preventing the creation or the strengthening of market power or to prohibit the abuse of a position of substantial market power (monopolisation). Competition authorities have to assess the competitive effects of decisions concerning mergers or potential anticompetitive conduct.’ (2012, p. 24, emphasis added.)
9§3 The proclamation of moral economic norms
Legislation enacts norms. All the legislative frameworks that were presented in Chapters 6–8 are conditions for the capitalist economic rights granted by the state (6D2) including the right to employ labour and to appropriate the surplus-value produced by that labour.
‘Competition law’ is no such condition. With its terminology such as ‘restriction or distortion’ of competition; ‘abuse’ of a dominant position, ‘unfair’ market practices, and ‘anti-competitive conduct’ (9§2-b and 9§2-c), the state proclaims moral economic norms. Seemingly this puts on the agenda the question of why the state entertains these particular moral economic norms, whilst seeing apparently no harm in the employment of labour (in the sense of exploitation of labour). However, these are moral norms about market interaction, not about production. Under normal conditions of unemployment (2D2, 7D3) the level of the market wage allows for the production of surplus-value.5 Moreover – quite consistently – ‘market power’, ‘dominant market power’ and ‘monopoly power’ in itself is not the target of competition policy. The target is rather the ‘abuse’ of such power (documented later on in 9§6-b). Although this is consistent, it is also ambivalent.
9§4 Execution of competition regulation as delegated to an ‘independent’ market authority: purification from conflict
Regulation of competition is generally highly conflicting as it infringes on free contracts between enterprises (9§2), as well as again in its required elaboration. The state therefore tends to phrase the legislation on competition in fairly general terms, and to delegate its execution – as including the design of specific (discretionary) rules – to an ‘independent’ market authority (or several market authorities).6 By way of this delegation, again, the state purifies itself, at least to some extent, from conflicts of right in concrete situations. (This fits into a series of similar purifications as summarised in Scheme 7.13.)
Conflicts of right are especially opportune for prohibitions, or non-permission, of mergers and take-overs and of monopolies (as conflicting with state-granted rights to property). Furthermore, regarding prohibitions of collusion and tacit or agreed price-leadership, its legal proof is most often difficult (besides, actors may perceive several types of agreement to be fair, if perhaps not legal or on the verge of it). It is equally difficult to define and to prove when a (reshuffling of a) market constellation should result in a too dominant market power of an enterprise or a group of enterprises.7
In face of the often considerable financial interests involved, much of the market authority’s decisions are disputed before a court and so end up as (deviating) court rulings and hence case law. Again the ‘independent’ court shields the state from conflict.
Division 2. Constraints on the mode of competition and (potential) constraints on the mode of capital accumulation
This division moves beyond conventional ‘competition policy’ in the strict sense. It rather regards two key (potential) effects of the market interaction of enterprises and banks, that, when left unconstrained, would generate vulnerabilities for the reproduction of the capitalist system. The first one, in 9§5, is the sequel to 4D2 (on deflationary price competition). The second one regards an open end in 7D2 (too big to fail banks), one that in 9§6 is specified, rather than it being the exposition of a systemic resolution, because it is actually not resolved (at the time when this book was completed).
9§5 Precluding a deflationary constellation: creeping inflation
Section 4§9 outlined how the combination of generalised price competition and speeded up technical change tends to generate economic stagnation. It was also indicated that there are no economy-inherent forces that turn a deflationary constellation into an inflationary one.
Because of this major economic-system continuity impediment, the state is forced to prevent this combination. (For reasons of general legitimation, 6§5, and for reasons of furthering the conditions of the accumulation of capital, 7§3. See 4§11 on the advantages of creeping inflation for enterprises and banks.)
As it is practically difficult to impose limits on technical change, the way out is to lay the conditions for ‘creeping inflation’ – in practice its euphemistic name is ‘price stability’. The state tends to delegate to the Central Bank the task of realising this price stability (i.e. creeping inflation).8
Even if creeping inflation is a ‘target’ for the CB (though see 9§5-c), in order to reach this target the CB merely has the instrument of influencing the rate of interest. When despite the efforts of the CB price deflation is nevertheless on the verge, extra state expenditure is more effective than monetary policy.
9§5-a Explication. The systematic position of the creeping inflation objective
The policy of creeping inflation regards competition policy carried out with monetary instruments. That is the reason why it is treated in this chapter. Because of the monetary instrument and because the policy tends to be delegated to the CB, it is usually subsumed under ‘monetary policy’ (I merely ‘nominally’ posited it as such in the brief section 7§8).
9§5-b Amplification. A target of creeping inflation at close to 2% – the cases of the EU’s ECB and the USA’s Fed
The CBs of the USA and of the EU interpret their mandate to seek price stability, by aiming at a rate of inflation of 2% per year (at the time of writing). For each this target is motivated by the avoidance of price deflation.
The ECB writes: ‘In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term.’ The stated reason is: ‘It avoids that individual countries in the euro area have to structurally live with too low inflation rates or even deflation.’9
The USA’s Federal Reserve states: ‘The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent … is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. … Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken.’10
9§5-c Amplification. A price inflation target – from systemic contingency to systemic necessity
Within the history of full capitalism the state’s monetary policy stance regarding price inflation or deflation is contingent. However, a policy target of creeping inflation (a term that the state itself evades by calling it ‘price stability’) is an important case of a contingency’s ‘becoming necessary’ – here that of a particular monetary policy stance (see the General Methodological Appendix A§13, point 5). Such a ‘becoming necessary’ also applies to regulation regarding banks and other enterprises becoming too big to fail, which is the subject of the next section.
9§6 The movement to oligopolies as entities being too big to fail and (potential) constraints on the mode of capital accumulation via its capping
Capital may be so concentrated within a single enterprise that enterprises in key sectors of the economy become too big to fail. (By itself this is a phenomenon that was only thrown into relief with the emergence of the 2008 financial crisis.) Key sectors are those on which a vast majority of actors is dependent whilst there is no ready substitute. This regards primarily the banking sector, the energy sector, and the communications sector (currently ICT).
Potential bankruptcy of main enterprises in such sectors – without the ready possibility of other enterprises in the same sector taking over the production – would severely affect the general conditions for the accumulation of capital. This requires the state to financially assist those potentially bankrupt enterprises. In effect this means that in good times profits are private, whereas in bad times losses are socialised.
In the context of the monetary framework, the exposition in Chapter 7 already alluded to this matter for banks (7§9). However, the threat of too big to fail applies also, at least potentially, for other sectors, such as those mentioned above.
So as to prevent the failure of big entities through the socialisation of losses, these ‘big’ entities would require to be intensely and effectively regulated and supervised. For banks such regulation and supervision would have to apply to entities that together make up 80–90% of the banking sector (Appendix 9A, section 9A-1). However, at least for the banking sector, and given the complex internal structure of big banks, this is practically unachievable. (See Appendix 9A, section 9A-2. Providing a gist of that section I mention here that in 2014 Andrew Haldane – as chief economist at the Bank of England responsible for the stability of the financial sector as a whole – declared that the balances of the big banks are ‘the blackest of black holes’.)
The alternative would be for the state to put a cap on the accumulation of capital in single banks and enterprises – as a general form of regulation. (Such a cap would put absolute limits on the size of banks and enterprises, such that they become small enough to fail.) However, a cap on the accumulation of capital in single banks and enterprises would be highly conflicting, as it would castigate the success in the accumulation of capital, which in fact clashes with the economic rights granted by the state.
Moreover (or therefore), such a cap does not fit the long-standing practice of market regulation in which (since the 1890 USA Sherman Act) the focus is on regulation in terms of the aspect of competition in the sense of market power (as measured by market shares or more sophisticated alternative tools), rather than economic power in a broader sense, which might include the absolute size of enterprises and banks, as measured by the capital accumulated. (Amplification 9§6-b.)
Nevertheless, a cap on the accumulation of capital in single banks and enterprises could – in principle – be endeavoured indirectly, by a regulation that ‘discriminates’ between ‘normal’ banks and enterprises, and those that pose a so-called ‘systemic risk’ (too big to fail). This can take the form of imposing on the ‘systemic risk’ entities much tighter reserve ratios than for ‘normal’ entities. To the extent that this would effectively and substantially affect their rate of profit, big entities might choose to break up into smaller entities of their own ‘free will’. (See Amplification 9§6-c about the Basel III, 2014, rules that might, still modestly, foreshadow this).11
However, whereas a focus on a (tighter) regulation of the liabilities side of balance sheets makes sense, its reliability keeps on depending on the unreliable valuation of the ‘black hole’ assets side. This is so because too highly valuated assets (an insufficient valuation of their risk) inevitably shows up in too highly evaluated equity, the latter being the ‘bookkeeping result’ on which the (tighter) reserve ratio applies.
At the same time, modestly tighter reserve ratios for big banks especially pose an enormous dilemma for the state, as – prior to their breaking up – tighter reserve ratios affect the profit and credit capacity of the big banks, and hence the credit-conditions for economic growth.12 For the state this is not a matter of a simple trade-off between economic growth and the statistical risk of another overall banking crisis. It is rather a matter of the uncertainty about it. Yet modestly tighter reserve ratios for big banks may indeed result in lower structural rates of growth. However, alternative to structurally lower growth rates, the state would have to accept the uncertainty of a (sooner or later) next overall banking crisis that may go along with an output loss of 100% to 500% of GDP (Appendix 9A, section 9A-3).
9§6-a Explication. A cap on the accumulation of capital in single enterprises?
Section 9§6 is in fact the observation of a vulnerability of the capitalist system as associated with the accumulation of capital as concentrated in single banks and enterprises. Putting a cap on this single entity concentration of capital would be alien to the capitalist system as it has existed hitherto. However, it seems necessary for the reproduction of the system.
9§6-b Amplification. Market power in contradistinction to ‘big’ economic power
The conventional competition policy is concerned with economic power in the sense of relative market power, not with the power of enterprises and banks in terms of their absolute size. For (conventional) competition policy I already referred to Schwalbe, Maier-Rigaud and Pisarkiewicz (2012, pp. 21–103) who provide an overview of the field with ample attention for the legal aspects. They remark (quotes within the following quote are their references to case law):
‘In EU competition law, a firm is assumed to have a dominant position if it can “… prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers …” Under US competition law, a firm is considered to have monopoly power if it has “… the power to control prices and exclude competition.” A dominant position or monopoly power is not per se illegal as a firm could have achieved this position because it was more efficient than its competitors, supplied superior products or outperformed its rivals through some other legitimate means. Nevertheless dominant firms will tend to have a wider range of instruments to their disposal to abuse market power to exclude competition.’
SCHWALBE, MAIER-RIGAUD and PISARKIEWICZ 2012, pp. 73–4, emphasis added
I quote this in order to emphasise that, at least within competition law, dominant relative market power seems by itself no reason to force enterprises to break up into smaller entities (small enough to fail). Thus the breaking up of banks and enterprises for reason of their absolute size – their being too big to fail – will require a brand new field of legislation, and one that is bound to be highly conflicting.
An enforcement for corporations to break up by itself would be no novelty, if it were for reasons of abuse of market power. There is the famous case of the 1911 breaking up of Standard Oil in the USA into about forty smaller entities. Another famous case is the 1982 breaking up of AT&T, again in the USA, into eight smaller entities. (In 1999–2000 there was an unsuccessful effort to break up Microsoft.)
9§6-c Amplification. The proposals of the Basel Committee on Banking Supervision (2014) as an indirect instrument for putting caps on the accumulation of capital in single entities.13
The proposals of the Basel Committee on Banking Supervision (2014) put to some extent, and indirectly, a cap on the accumulation of capital within single banks.14 The proposals entail a tighter regulation of the ‘too big to fail’ systemic risk banks in comparison with ‘normal’ banks. The required tighter reserve ratios for the former, for example (there are more requirements), dampen their potential profit rates, and so also change the competitive relations between the big and the less big banks. Such a precautionary regulative discrimination is unprecedented. Although the proposed tightened regulation of the ‘too big to fail’ banks seems as yet moderate (it may take another financial crisis before a heavier discrimination is proposed and implemented), it is, when less moderate, an indirect instrument to enforce big banks to break up into smaller entities, as that would positively affect the rate of profit of each smaller entity.
One major hot regulative issue is the ‘identification’ – by exact regulative rules – of a bank being too big to fail (one posing a ‘systemic risk’) or of approaching it.
Potentially the Basel instrument for banks could, as modified, in principle be applied to all sectors of the economy, by putting restrictions on the proportion between equity and loans (thus affecting leverage ratios and so the rate of profit on the internal capital). Potentially it could be applied to other key sectors of the economy with too big to fail risks. Connecting it to conventional competition policy in the narrow sense (9D1 and 9§6-b) it could also be applied to enterprises with ‘merely’ a large market power. However, this would require quite an increase in regulation, as well a change of the scope of competition policy.
As indicated in the main text, putting directly or indirectly a cap on the accumulation of capital in single banks and enterprises would be highly conflicting, as it would put restrictions on being successful in the accumulation of capital. Nevertheless the ‘discrimination’ as entailed in the regulation agreements of the ‘2014 Basel III Supplement’ seems a cautious first move towards it.
Summary and conclusions
This chapter presents the state’s concrete manifestation in its imposing a framework of constraints on the modes of market interaction of enterprises and banks, and of constraints on the outcomes of that interaction. Division 1 sets out the state’s engagement in constraints of market interaction that is ‘conventionally’ regarded as ‘competition policy’ as encoded in competition law. Division 2 sets out two main effects of market interaction on the market constellation – that is, generalised price deflation and entities that have become ‘too big to fail’ – ones that when left unconstrained would generate vulnerabilities for the reproduction of the capitalist system.
The state’s manifestation in competition policy engenders a particular mode of existence of the capitalist system. This manifestation is paradoxical as, in its prohibition of free contracts of cartel formation and of a category of take-overs and mergers, the state teaches enterprises what ‘proper’ market interaction is. With the state’s imposition of its view on proper market interaction, the unity of the capitalist economy and state reaches its most concrete manifestation regarding the functioning of ordinary markets. Nevertheless this is so conflicting that the state sets out the framework in general terms, delegating its details and execution to ‘independent’ market authorities. (Division 1.)
So as to prevent a market constellation associated with generalised price deflation (cf. 4D2), the state ordains a monetary policy resulting in creeping inflation (which is labelled by the state as ‘price stability’). It tends to delegate its concretisation and execution to the ‘independent’ central bank. (Division 2, 9§5.)
Whereas the state has engendered an effective monetary instrument for countering price deflation (even if its proportions, euphemistically called ‘quantitative easing’, may at times be grandiose), this is as yet (when I completed this book) not so for the enormous problem of the ‘too big to fail banks’, and, potentially, the too big to fail entities in other key sectors. The gradual movement to ‘too big to fail’ is an effect of market interaction that was only thrown into relief with the emergence of the 2008 financial crisis.
Regarding especially the banking sector, the complex internal structure of big banks has evolved such that effective regulation and supervision is practically unachievable. They have become ‘too big to know what is going on’, or the balances of the big banks have become ‘the blackest of black holes’. Therefore the system vulnerability stemming from ‘too big to fail banks’ can be countered only by putting a cap on the accumulation of capital such that entities become small enough to fail. However, this would be highly conflicting, as it would castigate the success in the accumulation of capital, which in fact clashes with the economic rights granted by the state.
Nevertheless it seems that the state (via the 2014 supplement to the Basel III agreements) is cautiously preparing the way for it. That is, by a ‘discrimination’ between big and small banks regarding leverage- and risk-weighted capital ratios. Such a precautionary regulative discrimination is unprecedented. This is not to say that, as yet, the ‘discrimination’ is heavy enough to compel big banks to break up into smaller entities. What is more, the cautious halfway house will merely press down the profits and the credit capacity of the big banks and so generate structurally lower growth rates – without solving the too big to fail threat. There seems no way out other than intensifying the discrimination, thereby enforcing a ‘small enough to fail’ constellation, even if its effectuation may ‘require’ another trembling financial crisis. (Division 2, 9§6.)
Appendix 9A. Too big banks: too big to fail and too big for supervisors
It was stated in 9§6 that putting a cap on the concentration of capital in single banks seems inevitable for the survival of the capitalist system. This statement is based on the incapability of the ‘conventional’ regulation of the banking sector as revealed in the 2008 banking crisis. The main objective of this appendix is to provide an underpinning of this incapability (section 9A-2). This is preceded by empirical information on the degree of centralisation and concentration of capital within the banking sector, and on the ‘systemic risk’ characteristics of big banks (section 9A-1). In the last section (9A-3) I provide empirical information on the social costs of the 2008 crisis and on the average bank rate of profit from 1996–2015 in the OECD-21.
9A-1 Centralisation and concentration of capital within the banking sector, and characteristics of big banks
1 Centralisation within the banking sector
A large bank failing causes bigger damage than a small one. I first present the common measure for market authorities of the relative size of entities in a market – in this case the banking sector. That is, the degree of centralisation in the banking sector is relevant. (I use the, in my view adequate, marxian term ‘centralisation’ as introduced in Chapter 4; the mainstream term is ‘concentration’. In brief, my term centralisation refers to the relative size in comparison with other entities in the same sector; my term concentration refers to the absolute size of an entity – measured in absolute money terms, or in percentage of GDP.) Graph 9.3 shows the average degree of centralisation within the banking sector for the OECD-21, as measured by the assets of the top-5 banks – and of the top-3 banks – over the assets of all banks in an OECD-21 country.
The most important point about Graph 9.3 is that after 2007 the centralisation has hardly changed (some increase for the top-5 and a slight decrease for the top-3). It can further be seen that on average there is a huge difference between the share of the top-3 banks, and those that rank 4 and 5. Over the last five years shown, a top-3 bank is on average 3.5 times bigger than banks ranged 4–5.
Because we know that the banking sector is a ‘large’ one within the economy, the data above provide some relevant information for the degree of ‘too big to fail’ banks. However, this measure does not account for the degree of interconnectedness of banks, and hence not for possible domino effects. Nevertheless, assuming that all banks are equally interconnected, the failure of a large bank has a larger domino effect than the failure of a smaller one.
Graph 9.3
Centralisation in the banking sector: assets of the five and three largest banks, as % of the assets of all banks – average of the OECD-21, 1996–2015
Data source: World Bank database Global Financial Development, ‘5-bank asset concentration’ and ‘Bank concentration’ (each updated 16 June 2017)15
2 Concentration of capital within the banking sector: money-creating banks
Too big to fail depends especially on the absolute size of banks as an indicator of the costs of saving a failing bank. It could be argued that a bank that is too big to fail must be saved at all costs (in that sense ‘too big to save’ does not exist, or it should be a terminology to describe a situation of collapse). Graph 9.4 relates the average asset-size of a country’s top-3 bank to its GDP. This measures the maximal direct costs of saving a large bank – maximal because when a bank fails, not all of its assets may be foregone and some of these can be sold to other parties. (This is about the direct costs – see section 9A-3 on the indirect costs.)
It can be seen from Graph 9.4 that the size of a top-3 bank as a proportion of GDP somewhat decreased from 2007 to 2012, moving back to near the 2007 level in 2015. This means that the degree of direct damage that goes along with the saving of a large bank is about the same in those two years.
Graph 9.4
Assets of one bank (top-3, or range 4–5) as a proportion of GDP – average of the OECD-21, 1996–2015
Data source: World Bank database Global Financial Development, ‘5-bank asset concentration’; ‘Bank concentration’; ‘Deposit money banks’ assets to GDP’ (all updated 16 June 2017)16
3 Characteristics of big banks
In an IMF paper, Laeven, Ratnovski and Tong (2014) study the connection between bank size and systemic risk (systemic risk is described as ‘the externalities of bank distress onto the rest of the financial system or the real economy’ – p. 14). They use a sample of 1,250 banks in 54 countries, among which 137 large banks (11%), the latter being defined as banks with assets of over US$50 billion in 2011. (The sample includes 15 OECD-21 countries.) The banks in the sample are money-creating banks (called ‘deposit-taking’ banks). The authors find (among other things):
-
‘First, large banks today engage disproportionately more in market-based activities.17
-
Second, large banks hold less capital than small banks, as measured either by risk-weighted capital ratios or a simple leverage ratio.
-
Third, large banks have less stable funding than small banks, as measured by the share of deposits in total liabilities.
-
[Fourth], large banks are more organizationally complex, as measured by the number of subsidiaries.’ (Laeven, Ratnovski and Tong 2014, p. 8.)
-
‘This [1–4] suggests that large banks may have a distinct, possibly more fragile, business model.’ (Laeven, Ratnovski and Tong 2014, p. 3.)
Focusing on 2007–08 in comparison with 2006 they also find:
-
‘Size per se is an independent factor that drives individual bank risk. Large banks are riskier than smaller ones.
-
However, among large banks only (over US$50 billion in assets), size per se ceases to be an independent risk factor. Instead, risk is driven by insufficient capital.’ (Laeven, Ratnovski and Tong 2014, p. 14.)18
This is an important study. However, the big question for researchers and for supervisors is the reliability of the valuation of the assets of banks, and hence of a leverage ratio or of risk-weighted capital ratios. This is the subject of the next section.
9A-2 Big banks: too big to know what is going on
It was indicated in 9§6 that putting a cap on the concentration of capital (‘bigness’) in single banks seems inevitable for the survival of the capitalist system. But why would ‘conventional’ regulation and supervision of banks not be sufficient? It is insufficient because regulators and supervisors, but also the management and the internal supervisors of banks, lack information of what they are supposed to supervise.
In 2014 Andrew Haldane (as chief economist at the Bank of England responsible for the stability of the financial sector as a whole) declares to Der Spiegel: The balances of the big banks are ‘the blackest of black holes’.19 The blackness in fact mainly applies to the (unknown) risks – or rather ‘uncertainties’ – taken by banks on the assets site of their balance sheet. However, the valuation of the assets is reflected in the value of the equity, which ‘blackens’ a leverage ratio or risk-weighted capital ratios.
In what I consider an important document on the 2008 financial crisis, Luyendijk (2015) sets out views from inside the banking sector and its supervisors. It is based on over 200 interviews with its actors (many of which also appeared in The Guardian). Below I quote from this book in the perspective of the supervisors’ lack of information on the ‘object matter’ of their activity.
In the early twenty-first century at least, supervisors, as well as the management of banks, lost a grip on the valuation of the assets of banks, and hence on the total of banks’ balance sheets. This valuation is (or is supposed to be) an important focus of the ‘prudential’ regulation and supervision.20
I quoted Haldane’s statement that the balances of the big banks are ‘the blackest of black holes’. In the same vain, Alistair Darling, in 2007–10 UK minister of finance (Chancellor), wrote in 2011: ‘There is much talk about whether [financial] institutions are too big to fail, or even too big to save, but there is another category too: too big to know what’s going on.’21
An anonymous senior regulator (supervisor) interviewed by Luyendijk states: ‘Ultimately, as supervisors, we rely upon self-declaration, upon what is presented to us by a bank’s internal management. But often they don’t know what’s going on, because banks today are so vast and hugely complex. … The real threat is not a bank’s management hiding things from us: it’s the management not knowing themselves what the risks are, either because nobody realises it or because some people are keeping it from their bosses.’22 (Emphasis added.) Apparently affirming this, an anonymous internal accountant (financial reporting) of a mega bank states: ‘The question is not only how much risk you are running as a bank. The question is if you even know what you own at any given point.’23
An anonymous former head of structured credit at a large bank explains to Luyendijk:
‘… most in the bank didn’t understand our products. Even the risk and compliance people who were supposed to be our internal checks and balances … We began to realise that we had to teach them how to monitor us. Then there were the people I reported to, who were getting calls from the people they reported to. I learned that the people high up know just enough for the role they’re in. “Just enough” is not enough in an emergency. I would be on the phone for hours explaining to people of increasing seniority what we were doing. And I realised, they don’t understand, not on a fundamental level.’24
If banks themselves are, to an unknown degree, ignorant about the risk-weighted value of their assets, could supervisors improve on this? Luyendijk mentions that about one million people work in the UK’s financial sector, against 5,000 for supervisors (0.5%).
I guess that even by a tenfold increase of the latter, ‘the blackest of black holes’ will not turn grey. Only when we have at least ‘grey’, sensible regulation of the assets side of banks’ balance sheets could come in. However, supervisors supervise on the basis of the existing rules. A former treasurer at a collapsed bank tells Luyendijk: ‘Regulation to keep the City in check? Don’t hold your breath. No matter what rules you put in place, they’ll always find ways around it.’25 (Many other commentators have observed this. Regulators are not one step ahead, but rather one or more steps behind the financial sector ‘innovations’.)
The focus in the last paragraphs has been on the assets side of the bank balance. But, as indicated, the valuation of the assets is reflected in the leverage ratios.
9A-3 Social costs of an encompassing banking crisis, and the temporary decrease in bank profit rates
1 Estimates of the costs of the 2008 crisis
Estimates of the losses associated with the 2008 financial crises are quite diverse, depending on what variables are taken into account and on the horizon beyond 2008.
In general terms an EC paper (European Commission 2014, pp. 41–2) refers to a 2010 study by a working group of the Basel Committee on Banking Supervision (BCBS), which reviewed ‘the literature estimating output (measured cumulatively in present value terms and as the deviation from trend GDP). Considering only the studies that assume a permanent level change in output, the median is 158%.’
The EC paper also refers to a 2010 paper by Haldane who suggests that ‘the output loss resulting from this crisis could amount to anything between 100% to 500% of GDP, depending on assumptions about how permanent the drops in output will be.’
The EC paper itself estimates that ‘output losses in the EU may end up as high as 100% of EU GDP, measured cumulatively in present value terms going forward.’
But there is more to take account of than output losses. Laeven and Valencia (2012) also include variables such as fiscal costs, increased public debt, and monetary expansion.26 However, there are also a variety of other important aspects of the 2008 crisis (and all crises), which are difficult to catch in monetary terms. Not least the effect that unemployment has on the lives of the unemployed and their children.
In a staff paper of the Federal Reserve Bank of Dallas, Atkinson, Luttrell and Rosenblum (2013) tried to incorporate a wider variety of measures to estimate the costs of the 2007 financial crisis for the USA. (Note that in the USA and the UK the crisis started in 2007.) These authors conclude that:
‘40 to 90 percent of one year’s output ($6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household) was foregone due to the 2007–09 recession. We also provide several alternative measures of lost consumption, national trauma, and other negative consequences … This more comprehensive evaluation of factors suggests that what the U.S. gave up as a result of the crisis is likely greater than the value of one year’s output.’
They also refer to the legitimation affect (in other terms):
‘Similarly to reduced opportunity, the financial crisis resulted in a significant loss of trust in government institutions and the capitalist economic system. (…) [T]he officials they entrusted to govern and to impartially regulate the financial services industry offered massive support and preference to a handful of the largest institutions. (…) [F]inancial institutions aggressively pursued profits and growth strategies that benefited management and, to a degree, owner-shareholders and creditors. Subsequent losses when the boom turned bust were disproportionately borne by taxpayers. Privatized gains, socialized losses …
However, saving the system in itself – especially with extraordinary government assistance provided to a handful of giant financial institutions – reinforced a perception that public support exists primarily for large, interconnected, complex financial entities.’
ATKINSON, LUTTRELL and ROSENBLUM 2013, p. 14
2 The bank rate of profit
How were banks themselves affected by the 2007/08 crisis and its aftermath? Graph 9.5. shows the bank rate of profit for the OECD-21 in the lead up to the crisis and afterwards.
Graph 9.5
Bank rate of profit on equity, before and after tax – average of the OECD-21, 1996–2015
Data source: World Bank database Global Financial Development, ‘Bank return on equity (%, before tax)’ and ‘Bank return on equity (%, after tax)’ (updated 16 June 2017)27
Although the effect on the profit rate of the crisis has been enormous, the rates of profit in especially 2004–07 were also enormous. Various authors that have observed banking from the inside (e.g. Luyendijk 2015) conclude on the basis of their sources – as against mainstream textbook economics – that the structure of banking is such that the aim is not the realisation of long-term profits, but rather short-term profits, which has to do with the incentive structure of bonuses and ‘shareholder value’. Having said this, it can be seen from Graph 9.5 that, at least over the period 1996–2015, the average rate of profit has not been too bad. One can only fall deep from a high top – this remark is not helpful when the trough is reached. However, especially large banks did (or could) know, or guess, that they were taking high risks in the pre-2008 years.
The following regards a detail. I suppose that the differences after 2006 between the pre- and after-tax profits have to do with the often very complicated tax rules about the carrying back and the carrying forward of (subsidiaries’) losses. (For one part losses of after 2007 are carried back to 2007, whence that year shows a small difference between the pre- and after-tax profit rate. The volatile pre- and after-tax differences between 2009 and 2013 are presumably the effect of the carrying forward of earlier losses.)
List of figures chapter 9
Scheme 9.1 The imposition of competition (outline Chapter 9)
9§1. The state’s manifestation in competition policy: engendering a particular mode of existence of the capitalist system
Figure 9.2 Recapitulation of the forms of market interaction as set out in Chapter 4
Appendix 9A. Too big banks: too big to fail and too big for supervisors
Graph 9.3 Centralisation in the banking sector: assets of the five and three largest banks, as % of the assets of all banks – average of the OECD-21, 1996–2015
Graph 9.4 Assets of one bank (top-3, or range 4–5) as a proportion of GDP – average of the OECD-21, 1996–2015
Graph 9.5 Bank rate of profit on equity, before and after tax – average of the OECD-21, 1996–2015
Tacit price-leadership need not involve ‘collusion’ in a legal sense; nevertheless it is often categorised under ‘tacit collusion’ (Ivaldi, Jullien, Rey, Seabright and Tirole 2003, see esp. footnote 2).
(1) The capitalist economic rights framework (6D4). This was successively grounded in: (2) the framework of allowance rights to existence (6D5); (3) the public security framework (6D6); (4) the monetary framework (7D2); (5) the labour-capacity framework (7D3); (6) the infra-structural framework (7D4); (7) the legitimating social security framework (7D5).
The signification of a ‘free market economy’ already applies for the Maastricht Treaty of 1992.
Official Journal C 83, 30.03.2010 or
Article 3 (3) states: ‘The Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.’ A brief ‘Protocol on the Internal Market and Competition’ states: ‘the internal market as set out in Article 3 of the Treaty on European Union includes a system ensuring that competition is not distorted’. (All emphases added.)
Considering as a main example the EU legislation on competition: none of the formulations in its two key articles (TFEU arts. 101 and 102) stands in the way of the exploitation of labour.
See 7§7-a on the term ‘independent’ in the context of delegation (in that section delegation to an ‘independent’ Central Bank). As with the CB, market authorities like to be labelled as independent. However, as the state delegates conflict dealing, it is foremost in the interest of the state to label (in this case) the market authority as being an ‘independent’ institution.
See Schwalbe, Maier-Rigaud and Pisarkiewicz 2012, pp. 21–103 for a review of the problems.
Creeping inflation is commonly defined as an inflation below 3% per year. (‘Walking inflation’ as one of 3–10%, ‘galloping inflation’ as one of 10–50% and ‘hyperinflation’ as one exceeding 50% per year.)
When I completed this book such (still modest) regulative norms were agreed within the Basel Committee on Banking Supervision, being only partly implemented in regulation, and not yet effective. (Basel Committee on Banking Supervision 2014.)
Bankers are aware of this dilemma for the state, and use it in their lobbying against tighter rules. See the not more than 12 lines in a statement of the European Banking Federation’s complaint about the tightening of the rules:
The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) sets rules for the regulation and supervision of banks. Its members are the 13 largest (GDP) OECD-21 countries, plus Argentina, Brazil, China, European Union, Hong Kong SAR, India, Indonesia, Korea, Luxembourg, Mexico, Russia, Saudi Arabia, Singapore, South Africa and Turkey.
In 2011 the ‘Basel-III’ rules were agreed upon, together with a phase-wise implementation between 2013 and 2019 (
See also the proposed EU implementation in November 2016:
That is, they do not (as in traditional banking) restrict to lending and borrowing – I add this because the latter is also a market activity.
The authors ‘proxy systemic risk through an SRISK measure, defined as a bank’s contribution to the deterioration of the capitalization of the financial system as a whole during a crisis.’ (Laeven, Ratnovski and Tong 2014, pp. 14–15.) Using this measure they find:
‘Large banks contribute more to systemic risk when they have less capital;
Large banks contribute more to systemic risk when they have fewer deposits;
Large banks contribute more to systemic risk when they engage more in market-based activities, as measured by the share of noninterest income in total income or the share of loans in assets;
The economic effects are substantial, especially for bank capital.’ (Laeven, Ratnovski and Tong 2014, p. 17.)
‘… large market-oriented banks may not be more volatile than traditional banks on a stand-alone basis, but they are more likely to fail together, and this creates risks for the financial system and the economy as a whole.’ (Laeven, Ratnovski and Tong 2014, p. 18.)
Luyendijk 2015, ch. 13 and The Guardian:
In quite some countries the so-called ‘prudential’ regulation and supervision is institutionally separated from the ‘conduct’ regulation and supervision, each so with separate authorities and delegations. In that case the CB adopts only the prudential part.
In Back from the Brink: 1000 Days at Number 11 (2011) – cf. Luyendijk 2015, ch. 7. Too big to fail is a phenomenon that gradually developed from the mid-1980s via mergers and take-overs (Luyendijk 2015, ch. 4).
Luyendijk 2015, ch. 8 and The Guardian:
Luyendijk 2015, ch. 7.
Luyendijk 2015, ch. 7 and The Guardian:
Luyendijk 2015, ch. 12 and The Guardian:
The EC paper does refer to the latter IMF paper. These authors studied the effects of a variety of financial crises from 1980 onwards, but regarding the 2008 crisis, and within their framework, they refrained from estimates beyond the last year of their data (2011).