Competitive policy amid the falling population

A merger of two regional banks in Kyushu put on hold by the Fair Trade Commission over monopoly concerns is raising a larger question: Should the competitive policy be reviewed when the market is shrinking under the nation’s declining population?

Businesses are expected to operate in an adequately competitive environment. If a company dominates the market in the absence of competitors, consumers will have no choice but to buy the firm’s goods or services irrespective of their price or quality, thus putting the company in a position of overwhelming advantage. The FTC’s job under the antimonopoly law is to keep vigil against the emergence of such a condition.

On the other hand, declining demand for financial services in Japan’s depopulated areas is shaking the business foundation of regional banks — key institutions that underpin the nation’s regional economies. The Financial Services Agency, which seeks to promote realignment of banks for their survival amid their shrinking markets, is at loggerheads with the FTC over whether antimonopoly principles should be strictly applied to mergers of these financial institutions.

At issue is the merger plan by two regional banks in Nagasaki Prefecture. Fukuoka Financial Group Inc. reached an agreement with Eighteenth Bank in February 2016 to integrate the operation of Shinwa Bank under its wing, the second-largest bank in the prefecture, with Eighteenth Bank, the largest.

But the merger, originally scheduled to take place in April last year, has been put on hold by the FTC, which argued that a new bank, commanding a 70 percent share of outstanding loans in the prefecture, would effectively monopolize the local market for financial services to the disadvantage of bank clients. Under such a monopoly, local borrowers would have no other choice than to go to that bank even if it imposes higher lending rates, the FTC has said, noting that it will not approve the merger unless the banks take steps to lower their combined share of the local lending market.

The FSA, for its part, has countered that lending rates would not automatically go up in accordance with the rise in the bank’s market share. The Bank of Japan made a similar point in its own research, and the Regional Banks Association of Japan has compiled an appeal to the government’s regulatory reform council calling for more flexibility in the FTC’s screening of mergers. FFG and Eighteenth Bank themselves are also exploring transferring their loans to other financial institutions to reduce their combined share of the local lending business. The FTC, however, has not altered its position over the merger.

There have been cases of regional bank mergers that have been endorsed by the FTC. But the FFG-Eighteenth Bank plan has drawn particular attention — and scrutiny — because of the dominant share of the local market that a merger of the two largest banks in the prefecture would command, and the possible impact such a merger would have on the economy there.

Regional banks across Japan face tough business prospects. Two years ago, the FSA released an estimate that more than 60 percent of the more than 100 banks that mainly serve local clients would suffer losses in their mainstay lending and other businesses in 2025. The BOJ’s ultra-easy monetary policy has significantly reduced the lending margins of the banks, which face the depletion of their local client base as many regional economies suffer from depopulation. Under the low-interest environment, the banks can no longer expect to stay profitable by managing their funds in government bonds. They compete with each other to lend — often by offering lower lending rates — to a declining pool of well-performing local businesses, which in turn eat into their resources.

Mergers of these banks have been explored as a solution to their plight. If the mergers are rejected and the banks’ business foundation weakens further, their function to service the local clients will likely suffer. Monopolizing the local market would not be desirable, but a depletion of banking services would also damage the local economy.

The FFG-Eighteenth Bank case should prompt discussion for a possible review of the competitive policy as the population — and economic activity — shrink. If the market itself is getting smaller, competition among too many players would hurt them all. Is the yardstick used to scrutinize for monopolies since the times of rapid economic expansion still relevant when the whole pie is getting smaller? Should the current antimonopoly principles be strictly maintained or flexibly adapted in view of the conditions in each sector? The regional bank merger case raises these questions.