Interest Rate Fixing?
Keith Sharfman reports on Truth on the Market that:
Israeli newspapers have an interesting story about a multibillion dollar antitrust suit that an Israeli manufacturing firm has brought against Israel’s three major banks. The complaint alleges that the banks price colluded on rates, charging identically in five distinct rate categories: a uniform prime rate always 1.5% above the central bank’s; a uniform risk premium of 3%; a uniform 3.5% extension premium; a uniform credit allocation fee of 1.5% per quarter; and uniform quarterly management fees of NIS 150.
Keith is skeptical about the merits of the case, because
It is not surprising that banks who pay the same price for capital would charge the same fee for it, just as it is not surprising for adjacent gas stations to charge the same price per gallon.
While there are good arguments for interest rate uniformity being driven by the market, I am not so sure about risk premiums, extension premiums, credit allocation fees, and — in particular — management fees. Why would we expect uniformity with respect to elements of price that are not directly related to common costs of capital? There were a number of serious cartel prosecutions in Europe on charges that don’t seem to be all that different. I am thinking of the “Lombard Club” in Austria, Germany, Italy, and the Netherlands.
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September 14th, 2006 at 1:51 pm
Well, it’s possible, of course, that there’s collusion. But I think the presumption should be against it (for the reasons Keith suggests) unless one can identify some sort of unique cartel enforcement device here. And while I agree that some prices are more likely than others to be the same across diverse firms, I would say two things: 1) all prices are more likely to be the same across diverse but heavily-regulated firms as I assume Israeli banks (like every other country’s banks) are; and 2) in part because of regulation, I think there is a strong case to be made for the risk and extension premiums to be the same, and I would bet that the flat rate management fee actually varies far more than the claim suggests, as it is undoubtedly often waived or discounted in various ways depending on the customer.
September 19th, 2006 at 10:01 pm
Thanks, Hanno & Geoff, for commenting so insightfully on my post. I basically agree with you Hanno that liability might be possible here. My main point is only that, as Geoff too explains, the evidence thus far described would not be enough to establish an agreement for purposes of a Section 1 analysis under U.S. law. But it’s entirely possible that more evidence might already be known to the plaintiff in this case, or could turn up later in discovery. I wonder what sort of evidence there was in those European prosecutions Hanno describes. Was it perhaps a smoking gun document evidencing an agreement to collude on price, or perhaps a witness who testified to this effect? My guess is that such evidence isn’t likely to be found in a case such as this where there are perfectly benign reasons for competitors to be meeting each other’s prices. But if such evidence does turn up, that could certainly change things.