Analysis on Bank Mergers and Competition

Analysis on Bank Mergers and Competition

Chinese Taipei

Abstract：

1. Main topics of the research:

Business mergers are indeed one of the strategies for corporate growth and continuous management. This is also true for bank mergers. The competent authorities in charge of the competition laws should scrutinize to maintain market competition in case of oligopoly due to insufficient competition or competition detriment to the benefit of business traders. Driven by a bigger environment and incentives from financial authorities, in the foreseeable future, banks in Chinese Taipei will engage in mass mergers. The Fair Trade Commission (FTC) will, in order to maintain trade order, protect consumers' interests, ensure fair business competition, contribute economic stability and prosperity, scrutinize merger applications that limit market competition due to mergers to ensure straightforward competition without being distorted by market structures. The purpose of this research is to provide some suggestions in future enforcement on the basis of the competition laws in creating a win-win situation in continuous market competition and promotion of business developments.

2. Methodology and process:

Collected documents regarding definition of bank-related markets and further analyzed the way in which the market materials have been collected.
Combined with the plan of going abroad on a study tour with this plan of research, researchers have been to the U.S. and Canada and paid personal visits to authorities who are familiar with related issues. Researchers have then absorbed relative experience, bought books, and learned materials relating to the business mergers for reference and analysis.
Scholars, experts, bankers and businessmen, and government authorities were invited to a seminar on June 27, 2000 for this research report to exchange ideas concerning bank merger issues in order to consolidate the analysis.

3. Summary and Conclusion

Chapter Two of the research first examines the history of domestic development in the banking industry. Second, it analyzes the background, current situation and relative issues regarding domestic bank mergers. It further analyzes, in law and in practice, the structure of bank consolidation in Fair Trade Law in order to outline the models and problems, which the FTC has to face. Because the banking industry concerns a wide range of markets, it is the beginning of the analysis of competition of bank consolidation to define the anti-trust markets of the banking industry. Chapter Three of the research has widely collected materials in theory and in practice, both foreign and domestic, along with real experiences and the principle of the Canadian Bureau of Competition in dividing bank markets. To ensure that there was significant data for reference in competition analysis, the FTC has thoroughly examined the market structure in bank competition-from the measure in need and supply, the reasonable definition of the geographical markets, and to the element of time. This has been an international trend since 1980 in regards to bank mergers. Competition law authorities have been mapping out principles in accordance with individual business needs to efficiently cope with similar bank consolidation. Chapter Four of the research outlines the decision guidelines and explains the result of individual cases of real experiences in the U.S., Canada, Australia, and European countries in order to list elements in approving or objecting bank consolidation applications. Finally, Chapter Five of the research raises the following analytical procedures of authorities in charge in dealing with bank merger applications:

Reasonably defining the market according to the protected target in competition policies.
Structure the standard of competition analysis according to real business structures and future developments.
Examine thoroughly the merger application-aiming at markets with anti-competition when consolidated-respectively in possible market abuse, in business interaction, and in market intervention.
Verify and assess the reason regarding effectiveness from consolidating banks.
Unless the consolidating banks are in danger of folding, the authorities in charge should adopt a neutral attitude towards the self-proclaimed reasons by the banks that are about to merge, such as increasing international competition or heightening public interests. Opinions and recommendations should be issued by other authorities concerned to prove those proclaimed reasons.

4. Suggestions:

Based on the above conclusion and to let FTC have the resource to process efficiently merger applications and to outline in advance future change of the financial environment, the suggestions are listed below:

More communication and coordination with financial authorities: Due to the scope in connection with the bank merger as well as the tremendous effect on financial business, FTC seems to have the responsibility to from time to time communicate with financial authorities-for the purpose of coordination and clarification of the roles between authorities in charge of competition laws and financial authorities-to enforce a big-scale prospect in dealing with bank merger applications. Also, the FTC may further try to remove any difference between the FTC and financial authorities in order to let business come to an understanding and avoid over intervention and control. We can learn from the Australian Competition and Consumer Commission with respect to communication with financial authorities.
Improve the collection and its completeness in financial statistics materials: The first step in analyzing merger competition is to define the market area. The second step is to calculate the market share in the merger in order to assess the competitiveness of the market. Without complete financial data in calculating the market share, market structures and competitiveness cannot be reflected and thus the definition in the market will be in vain. Therefore, to increase the level and believability of the FTC in competition analyzing, the FTC should collect more materials and strengthen its analytical abilities.
Utilize Negotiation Diversification to reduce the doubt in anti-competition of merger applications: The Negotiation Diversification mechanism, developed and widely use by international financial authorities in the U.S or Canada, has been considered as a successful mechanism. With advanced negotiation, the FTC may sign a contract with a merger bank applied for merger approving the merger banks application provided that the merger bank agrees to give up operation of the anti-competition business. This can be done without having to amend the law and can respect the decision of the merger banks. It will have the most effect under the control of the FTC.
More specific and transparent principles and procedures in competition regarding bank consolidation: To expedite and efficiently examine bank consolidation applications, the FTC may adopt the following methods: First, in assessing the standard-if limited competition is involved-besides the current standard it may rely on market contact, or the opinion of product experts in a financial institute; second, at every level of examination, the FTC authorities have to contact the applicant in order for the examiner to understand what items the applicant is applying, and for the examiner to gain necessary information; third, FTC shall notify the applicant the final results as soon as possible and at the same time provide sources for help and time frame with the applicant for reference; fourth, if in the analysis the market is obviously not concentrated enough, easy to enter, and the market can maintain effective competition, then the analysis can be stopped to save time and money. The FTC may consider adopting the two-step examination used in foreign countries to exclude the market that does not pose doubts in competition and to concentrate on the market that obviously has an unfair competition.
Adjust the standards for domestic bank mergers accordingly in order to fit into international standards: It is neither objective nor adaptable for business by using market share as a standard for application. The standard regarding a paid-in capital of NT$5 billion is also too low so that almost all merger applications need to be approved by the FTC. However, considering foreign practices, there has not been any pain-in capital standard for individual applicants. Still, this standard shall be raised in accordance with the changing economy and environment in order to filter those mergers that limit competition.
Aim at the trend in conglomerate banks, and intervene in the competition mechanism and regulation: The promulgation of the U.S. Financial Services Modernization Act of 1999 will speed up the merger and acquisition of American business. In the government's Knowledge Economy Programs it has established a managing mechanism of share control of a company. In the future, financial companies are allowed to turn into investment and consulting companies. Other conglomerate banks are forming. The FTC, in light of the trends of bank mergers, shall scrutinize any applicant suspect of limited competition or unfair competition to maintain a healthy financial industry.

Written by
Wu Cheng-wu, Hu Kuang-Yu, Wu Pi-Ju, Liang Ya-Chin (First Department)