Concern for Unfair Competition

Abstract

Those, such as the Securities Industry Association, who oppose giving commercial banks the right to deal directly in securities argue that ‘[b]anks are inherently unfair competitors outside of banking, if, as is now the case, they can use their federally-derived banking relationships, credit sources and credit tools to promote their non- banking business’ (Securities Industry Association, 1987, p. 12). Mehle (1975), who presented probably the best and most influential statement of concern about unfair competition, enumerates the specifics of the unfair advantages banks are said to possess. In analysing the arguments on bank underwriting of municipal revenue bonds, Mehle finds that ‘neither the default nor the market risk argument militates against bank underwriting of revenue bonds’ (ibid., p. 1132, footnote excluded).¹ He finds unpersuasive the evidence for and against predictions that bank entry into revenue bond underwriting would lower costs to municipalities. Nonetheless, he concludes that banks should not be allowed to engage directly in underwriting, because they ‘enjoy significant competitive advantages over non- bank underwriters — lower cost of capital, tax deductibility of carrying costs, and captive markets — making underwriting competition between the two groups unfair’² (ibid., p. 1155).