Not all bankers are getting away with it. Neelie Kroes, the European competition commissioner, has forced ING to split itself up and to accept stringent price restrictions on its core operations. The Dutch bancassurer is paying a heavy price for its €10bn of state aid.
Ms Kroes has boldly, and rightly, struck to prevent ING’s emergency government rescue distorting the banking market in the long term. She is not alone in worrying about competition in finance. In the UK, Lord Myners, the financial services minister, has launched an attack on investment bank fees, and the Conservative party wants a competition inquiry into the sector.
They all have good, long-standing reasons to believe that competition in finance is weak. Costs are often structured strangely. M&A fees, in particular, are peculiar. These misalign incentives between advisers – who make money from deal completion – and clients – who only make money from successful tie-ups.
But even when cost structures are saner, levels of fees are often not. Many fund managers charge jaw-dropping amounts – and often do so opaquely. Alan Miller, formerly of New Star, estimated that a fund with fees advertised at 1.6 per cent annually could, in truth, cost a client 3.8 per cent.
The fruits of these practices are visible in the fattened accounts and bonus pools of the sector: in 2007, finance generated 23 per cent of all US corporate profits. These pieces of evidence all point to a serious lack of competition within the industry.
In some cases, a lack of competitive pressure is purely a result of concentration of supply: oligopolists feel little need to fight for market position. The consolidating effects of the crisis, leaving fewer banks standing, will have worsened this powerful effect.
But opacity is also a big problem. The average company director knows little about bond underwriting or M&A, and there is little public information about service providers available. So, when these businesses shuffle uncomfortably into these areas, they all flock to the well-known brands: after all, no one ever got fired for hiring Goldman Sachs.
Governments must be willing to do brutal things, as Ms Kroes has done to ING. But they must also take subtler steps, making sure that information exists to allow customers to compare the performance and prices of service providers. As governments redesign regulation to make the financial system more stable, they must also try to make it more competitive.
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