The Ministry of Finance has asked The Netherlands Authority for Consumers and Markets (ACM) to investigate the Dutch savings interest rates market. This is because European Central Bank interest rates are historically high, while savings interest rates at major national banks lag behind. According to the ACM, banks keep a close eye on each other, leading to tacit coordination on savings interest rates. Limited competition in the savings market keeps savings interest rates low. The ACM keeps a close eye on banks but cannot yet intervene effectively. This could change in the future. Pim Jansen, Professor of Economic Administrative Law at Erasmus School of Law, was interviewed about this in Het Financieel Dagblad. He argues that the recent report on banks could be a possible harbinger of a greater role for the ACM. The authority is seeking more power, inspired by the 'new competition tool' already in use in several other European countries. This tool allows regulators to intervene in cases of market failure even without a breach of competition law.
"The market share of the three big banks remains stable because consumers rarely switch to smaller banks with higher interest rates. As a result, the big providers feel little need to increase their savings rates", Jansen said. The ACM published the results of its research at the end of May. "One solution is to lower switching thresholds so that consumers can switch more easily and take the benefits of higher savings interest rates. The ACM cannot currently lower switching thresholds. The legislator has to do that", said Martijn Snoep, ACM board chairman.
Tacit alignment
Normally, companies compete to gain a better market share, but it can also happen that companies actually agree not to compete with each other. The Competition Act prohibits such explicit agreements, but tacit coordination is more difficult to tackle. Jansen explains that this form is difficult to prove because it often happens without explicit agreements. "The ACM's current powers may not be sufficient to effectively combat tacit coordination."
According to Paul de Bijl, Chief Economist at the ACM, and the recent ACM study, it is crucial to promote competition in the savings market. One possible solution is the "new competition tool". Jansen explains that this tool can help intervene more quickly in cases of market failure without explicit violations. "However, it is important to set clear frameworks to avoid arbitrariness. De Bijl recently pointed out that market outcomes such as tacit alignment are common in stable markets, which would make such a tool useful."
Market failure?
Market failure, an economic concept where supply and demand lead to an undesirable outcome, may justify government intervention. "According to the ACM, stable markets with few providers and homogenous products are conducive to tacit coordination, which may indicate market failure justifying intervention", Jansen said. "Recent insights from experts support this, pointing to the need for transparency and the ACM's ability to intervene in case of market failure."
The ACM has made a number of recommendations to politicians. Jansen explains that these recommendations are generally well-founded and legally feasible. "However, their effectiveness strongly depends on the political will to turn these recommendations into policy. It would be a step in the right direction, but further measures may be needed to actually promote competition."
So, could the 'new competition tool' ensure higher savings rates? The answer seems to be a conditional yes. The tool offers an instrument to channel the power of banks and other players to promote competition, but its success depends on any willingness to really intervene. The ball is now in the legislators' court: will they choose to create a competitive savings market or will consumers continue to be disadvantaged by tacit alignment?
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