When Systemic Risk Meets Antitrust: Dodd-Frank's Impact on Competitive Markets in the Wake of an Economic Crisis
52 Pages Posted: 12 Oct 2016 Last revised: 19 Nov 2017
Date Written: October 7, 2016
In the financial crisis of 2007-08, the federal government was forced to act quickly to save systemically significant firms. Federal agencies often had to improvise solutions on the fly, arranging mergers and taking majority shares in key firms as the need arose. The antitrust agencies also had to work quickly to review emergency transactions for competitive impact.
To meet the next crisis on firmer footing, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which includes detailed plans for orderly liquidation of systemically important financial institutions (“SIFIs”). Under these Dodd-Frank procedures, the FDIC would take control of a failing SIFI and either arrange a merger with a healthier firm or transfer its assets and liabilities to third-party firms or to a bridge financial company. Dodd-Frank also includes provisions giving the Federal Reserve new oversight of certain transactions that might have a systemic impact on the economy.
Scholars have debated how the antitrust laws and agencies performed during the 2007-08 crisis, but there is a gap in the literature regarding Dodd-Frank’s impact on the application of the antitrust laws in future crises. This Article addresses that gap. Because of ambiguities in Dodd-Frank’s drafting, the role that competition principles and antitrust law will play in the next crisis is open to interpretation. On the one hand, the law’s drafters made efforts to ensure that the antitrust laws would continue to apply, including by inserting a sweeping antitrust savings clause in the Act. On the other hand, the Act’s orderly liquidation provisions appear to open dangerous gaps in antitrust enforcement, creating conditions for increased concentration in key markets after the next crisis.
This is a potentially serious problem: increased concentration tends to harm consumers and economic growth in the long run and concentrated markets may be more susceptible to systemic risk. But solutions are available. This Article proposes a number of possible fixes and argues that the most realistic and effective would be the development of a regulatory regime under which the FDIC and the SIFIs themselves provide the Department of Justice’s Antitrust Division with advance notice of potential failures and possible purchasers for key assets in any orderly liquidation. With this type of notice, the Division could determine quickly — before the liquidation process begins — whether any contemplated transactions might pose competition issues and advise the FDIC accordingly. This arrangement should help ensure that crisis-related transactions do not result in more concentrated, less competitive, and riskier markets post-crisis.
Keywords: Dodd-Frank; antitrust; competition; orderly liquidation; securities
JEL Classification: G18, G20, G23, G28, G34, G38, H12
Suggested Citation: Suggested Citation