Antitrust and Financial Regulation in the Wake of Philadelphia National Bank: Complements, Not Substitutes

• Author: Lawrence J. White
• Position: Stern School of Business, New York University
• Pages: 413-430

ANTITRUST AND FINANCIAL REGULATION IN THE

WAKE OF PHILADELPHIA NATIONAL BANK:

COMPLEMENTS, NOT SUBSTITUTES

L

AWRENCE

J. W

HITE

*

Antitrust and the financial sector have had a wary relationship with each

other.

1

Because the financial sector traditionally has been and continues to be

heavily regulated, incumbent firms in that sector have often preferred to be

shielded from antitrust scrutiny by claiming (usually with the support of their

regulators) that financial regulation was sufficient to protect the public interest

and consequently that antitrust jurisdiction was not necessary. This appears to

have been one of the arguments advanced by the appellees (but rejected by the

Supreme Court) in Philadelphia National Bank.

2

Although this shielding has

diminished over the decades, a prominent modern remnant of that tradition is

the continued exclusion of insurance companies (which are regulated by the

states) from federal antitrust jurisdiction by the McCarran-Ferguson Act of

1945.

3

This article will explore the connections between the financial sector and

antitrust. It will argue that the competition paradigm that serves as the founda-

tion for antitrust is as valid for the financial sector as it is for the other sectors

of the economy where antitrust regularly applies. Accordingly, there should

* Stern School of Business, New York University. During 1982–1983, the author was the

Director of the Economic Policy Office of the U.S. Department of Justice’s Antitrust Division.

During 1986–1989, the author was a board member on the Federal Home Loan Bank Board with

responsibilities that included being a board member of Freddie Mac. An earlier version of this

article was presented at the Conference on the Fiftieth Anniversary of United States v. Philadel-

phia National Bank held at New York University School of Law (Nov. 15, 2013). Thanks are

due to the participants at the Conference for helpful comments.

1

For an earlier discussion of this wariness, see Lawrence J. White, Financial Regulation and

the Current Crisis: A Guide for Antitrust, in C

OMPETITION AS

P

UBLIC

P

OLICY

65 (Bernard A.

Nigro, Maureen K. Ohlhausen & Charles T. Compton eds., 2010).

2

United States v. Phila. Nat’l Bank, 374 U.S. 321, 368 (1963).

3

McCarran-Ferguson Act, 15 U.S.C. §§ 1011–1015; see also Credit Suisse Secs. (USA)

L.L.C. v. Billing, 551 U.S. 264 (2007) (The Supreme Court decided that the Securities and

Exchange Commission’s regulation of securities underwriting for initial public offerings (IPOs)

precluded an antitrust case against the underwriters.).

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[Vol. 80

be no exemptions from antitrust scrutiny for the firms that are in and around

the financial sector. However, the financial sector is an area where firms that

compete with each other often find it convenient—and efficient—also to

communicate and cooperate with each other; but such communication and

cooperation also raise all of the usual suspicions as to the opportunities for

anticompetitive (and thus socially inefficient) collusion with respect to prices

or other important dimensions of competition. This communication and coop-

eration among competitors in the financial context thus raise important anti-

trust issues that deserve more discussion and analysis.

This article will proceed as follows: Part I will lay out some important

background concepts with respect to finance, the financial sector, and finan-

cial regulation. Part II will address some specific areas of finance where vig-

orous antitrust enforcement—public and private —has been present and is

appropriate. Section III will discuss some specific issues that arise in the areas

where financial firms that compete with each other may also communicate

and cooperate with each other. Section IV will conclude.

I. FINANCE AND FINANCIAL REGULATION

Finance is special for at least three reasons: First, finance is ubiquitous.

Almost all enterprises need finance to obtain the resources for investments

and to bridge the gap between the time when inputs are paid and the time

when payment is received for the sale of outputs. Almost all governments

need finance, again, to obtain the resources for investments and to bridge the

gap between the time that expenditures are made and the time when tax reve-

nues are received. Almost all individuals need finance, so as to accommodate

large investments and purchases and to bridge smaller expenditure/income

gaps. In addition, finance underlies the operation of the monetary/payments

system of any modern economy.

Second, finance unavoidably involves a time dimension: A loan or an in-

vestment is made at an initial point in time;

4

repayment is expected to occur at

some future point in time.

5

This time interval means that the lender always

faces some uncertainty as to whether the borrower will repay the loan. This

uncertainty reflects the lender’s informational disadvantage vis-`a-vis the bor-

rower (i.e., asymmetric information). Before the loan is made, the lender may

have difficulty in figuring out whether a prospective borrower is likely to

4

For ease of exposition, the following discussion will be in terms of a “loan” that has a

“lender” and a “borrower”; but the basic ideas carry over to the issues that surround equity

investing.

5

For insurance, there is a similar time sequence: At an initial point in time a commitment to

insure against a specific event is made, and the insured party makes a “premium” payment to the

insurer; then, subsequently, if the insured-against event occurs, the insurance payment is made

by the insurer back to the insured party.