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When the Whistle is Blown there is still a whole race to run

It was roughly a year ago, in the 6th of March of 2013, that the Portuguese newspapers released information about raids by the Competition Authority to more than 15 different banks. According to the information provided, the British Barclays denounced a cartel of which it was part in Portugal. Allegedly, banks have been colluding to keep the spreads high. With investigations going on it may still take more than a year for the Competition Authority to take a final decision regarding this case.

The first question someone could ask itself is why Barclays denounced itself. The British bank has been involved in different scandals in last years, like the manipulation of the LIBOR, and the new CEO promises a policy of transparency and ethics. Nonetheless, the importance of the existence of a leniency program in Portugal cannot be ignored. By denouncing this cartel Barclays is exempt from any fine for having blown the whistle.

The second, billion dollar question is whether we really have a cartel. Most people would be happy to scream “yes”, but more than from any knowledge this comes from an anti-banks feeling that has been on high levels since the beginning of the 2008 Crisis. Besides that, everyone would like to get higher interest on deposits and lower on loans, so it is easy to say that the current rates are not the product of competition.

What is the evidence? The banking system can finance itself at the EURIBOR rate an average interest rate for loans between banks. This means that this rate, in a way, guides both the rate charged on loans and the one paid on deposits. As we can see from the following graph:


The data in this graph was taken from Banco de Portugal, the EURIBOR rate is for 12 months maturity. In the graph I distinguished three different types of loans (for housing, for companies and for consumption). This graph does show us how the EURIBOR is an important reference, and indeed most rates have followed the movements of the EURIBOR, making the affirmation of a cartel questionable.

Nonetheless, the next graph may be more useful to assess this. The accusation is that the banks had a cartel on spreads. If true, this means that the banks agreed not to compete by reducing spreads to get more clients.


We can see a similar pattern in all spreads, with a general decrease between 2010 and October of 2011. After this period the spreads start increasing.

The difficulty in mantaining a cartel is the existence of an incentive to cheat on the promise of keeping the spread high, in order to steal clients from the rivals. This decrease in spreads that occurs until October of 2011 is not very congruent with the existence of a cartel. Indeed, looking at this anecdotal data, if existent, the cartel would be posterior to this date. But notice that the moment of increase in the spreads coincides also with the moment in which the EURIBOR starts going down because deposit rates go down faster than loan rates. This could be explained by search models in which banks, taking advantage of quasi-rationality of people (or search costs), do not decrease loan rates so steadily immediately, because they can still get clients who did not inform themselves completely of the different rates of each bank. This could also explain the sudden increase in the spreads, because loan rates did not react to the EURIBOR decrease as fast as the deposit rates.

On the other hand, the increase in spreads is already lasting for longer than search models would probably explain and are at the highest level of the last years. Actually, why would Barclays lie?

It looks like it is not that easy to see whether there is a cartel or not. Even with such a simple analysis we already find arguments for both sides and with a more detailed analysis certainly a lot more points would arise. In the end it is up to the Competition Authority to find enough evidence of the existence of a cartel or not, but even with a denunciation there is still a lot of work to be done: just like in a race, when the whistle is blown there is still a whole race to run.

João Ritto, #623, Masters in Economics


Author: studentnovasbe

Master student in Nova Sbe

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