Interest Rates and Antitrust

Cite this Article
Keith Sharfman, Interest Rates and Antitrust, Truth on the Market (September 14, 2006),

Today’s 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.

Not being an expert in Israeli antitrust law, I cannot confidently predict an outcome in the case. I can say, however, that such allegations would have a tough time succeeding here in the U.S. An individual bank’s position in world capital markets is very similar to the position of a single gas station in the world market for oil. Both are classic “price takers” in the sense that neither can affect the world price by its own behavior. 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. Such pricing behavior may well be the product of competition and is hardly evidence of collusion. Firms operating in competitive markets can ill afford to charge more than their competitors.

To be sure, the banking industry is heavily regulated both here and in Israel, and thus banks in both countries may well be earning supracompetitive profits. But the abnormally high profits engendered by regulation are not forbidden by antitrust, which condemns only the anticompetive behavior of private actors and not the actions government.

A hopeful sign in the case is that Israel’s antitrust authority has not signed on. The sophisticated lawyers who work there, many of whom have studied at American law schools, are well aware of the difference between price collusion and price leadership. Hopefully the Israeli courts that are hearing this case will understand this too.