Maarten Pieter Schinkel, professor of Competition Economics and Regulation at the University of Amsterdam, carries out research into price leadership bans in the Dutch mortgage market imposed by the European Commission on banks that received state aid from the Dutch government during the financial crisis.
When speaking about it, Schinkel sounds passionate and at times concerned. The bans, introduced by Euro Commissioner Kroes in 2009, effectively resulted in a price monopoly for the Rabobank, the only major bank not receiving state aid. The bank could determine the margins and this led to a huge increase in profits from mortgages. The plot is a combination of mathematical economics and investigative journalism. According to Schinkel the price leadership bans are a significant cause of why the mortgage margins in the Netherlands are out of step with other European countries since then. Schinkel’s calculations show that with interest rates that were on average 0.3%-point too high, mortgage holders paid between 4 and 6.5 billion too much in interest payments over the past few years. Schinkel: “The issue is that demand is fully inelastic, since it mostly concerns people who had to refinance their mortgage when their fixed interest period had elapsed. They didn’t have the option of saying ‘don’t offer me a mortgage then’.”
Schinkel became interested in the Dutch mortgage market when he saw research from the Netherlands Competition Authority (NMa) in 2011. “When I read it I felt there was something strange about it. The report made a half-hearted attempt to demonstrate there was no evidence of a cartel. Even though the margins calculated by the NMa were high, it believed to see a slight decrease at the end of the period analysed. Based on this, the NMa concluded that interest rates had fallen back in line with normal levels. This seemed a premature conclusion to me. When a good master’s student approached me for a thesis subject, I suggested this. She uncovered more and more information, including how the price leadership bans were adopted at the insistence of the Rabobank when it contacted Kroes. Furthermore, the margin fell when the NMa started it investigations, and rose again significantly right after the NMa report was published. We reported extensively on this at the time. In April 2013 the NMa issued a new study in response to Schinkel’s publications. This report repeated the conclusions of their previous report: the price leadership bans had not affected the margins. Schinkel: “The NMa persisted with the argument that the margins had already risen several months before the ban was legally in force. I defended my position by explaining that the announcement of the ban was sufficient to achieve this price effect.”
An episode of the television programme Zembla, that aired in September 2012, was based on this research. Schinkel spoke in detail about the timeline and how Euro Commissioner Kroes strongly insisted on the price leadership bans in the spring of 2009. There are conspiracy theories that could explain Kroes’s intentions, but Schinkel has put these aside for the moment. “No one has been able to prove that there was malicious intent on the part of Kroes. But it was definitely poor judgement to impose price leadership bans on three of the four major players in a market. Commissioner Kroes, who was responsible for competition at the time, can be held accountable for that. In the meantime regulators in the Netherlands perhaps felt that shielding the banks to some degree from competition in a difficult period might not be such a bad thing. In the end it looks like mortgage holders with a variable interest rate or lapsed fixed interest mortgages are the ones who have paid for this.”
Schinkel is determined to get to the bottom of the whole price leadership ban affair, both in a theoretical and empirical sense. He is working on both approaches. Meanwhile, in his opinion, the banks are giving implausible explanations and the cartel watchdog NMa, now part of the Authority for Consumers and Markets (ACM), is not investigating the matter with sufficient thoroughness. Schinkel: “The ACM denies there is a problem that they can tackle. And the banks are trying to explain away the high extra margins – they talk about higher funding costs due to higher risks, necessary funding from abroad – but these are aspects we all take into account anyway when calculating the margins. No bank has so far been able to demonstrate what the x-factor is that we would be missing in our calculations. They even claim that the margins we discovered are ‘normal profit margins’, compared to losses they say they incurred on mortgages in the preceding years before the crisis. I find that far-fetched, so I am going to continue keeping an eye on them. I feel this is an important subject.”
In addition to working on a theoretical model of the abovementioned anticipation effect, Schinkel is also working on comprehensive empirical research based on data from the Nationale Hypotheek Garantie (National Mortgage Guarantee). The data is available on a daily basis for each mortgage. “Good research takes years. The econometrics behind the daily interest rates is extremely complex and that is the real work that eventually should be published in a leading academic journal. I am also responding to current events in my research, such as the conditions for state aid for the SNS Bank. I always use well-substantiated arguments and prefer to err on the side of caution,” says Schinkel.
One preliminary finding is that since 2009, there is a structural difference in the extent and speed with which the Rabobank is followed by the other banks. Our hypothesis is that the Rabobank changed from a competitive price leader to a collusive price leader. And it seems that the Rabobank was indeed more closely followed by other banks when it changed its mortgage interest rates since the price leadership bans were apparent. Schinkel has also identified progress among banks in the area of competition: “They are getting better in their arguments. Actually, my specialism, economics of competition policy, was relatively unknown to them. Traditionally, it is macro-economists that work at these banks. No one seemed very interested in micro-economics or competition, for it was hardly a policy issue. But this is starting to change. Take a look at the Libor and Euribor cases where the European Commission suspects cartel activity. They’ve even hired a few of my former students. The debate is becoming more intelligent and this is good news for the advancement of our field.”
In spite of his activist role, Schinkel emphasizes that he always remains an independent researcher, for example in dealing with the Dutch homeowner’s association Vereniging Eigen Huis (VEH). Schinkel: “VEH uses our calculations for a monthly interest rate barometer on their website. In exchange they purchased expensive data that we needed for our research and otherwise would not have been able to obtain. We have a good working relationship with VEH but we don’t work for them. And as a scientist I am always open to well-founded arguments on either side. The results speak for themselves. It appears that since SNS bank has started offering competitive rates in August, the margins have been substantially reduced. This shows yet again that a little competition – even if it’s initiated by politics – can result in enormous benefits.”