State-aided Price Coordination in Dutch Mortgage Banking

NOTE: THIS SEMINAR IS ON A THURSDAY

Time: Thursday January 17th, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Maarten Pieter Schinkel (UvA)

Discussant: Michiel Bijlsma (CPB)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: Historically the Dutch mortgage market has been highly concentrated, yet competitive. During the financial crisis, all of the main mortgage providers but one received State aid. In an attempt to offset distortions of competition feared to be brought about by the aid, the European Commission imposed strict conditions on the aid recipients. The State-aid condition were negotiated in the Spring of 2009 and included so-called price leadership bans (PLBs). These prohibited aid recipient banks to price below non-recipient banks. Three of the four main players in the Dutch mortgage market were put under a PLB. We show that margins on Dutch mortgages over the costs of attracting funds shifted to historically high levels in anticipation of these bans taking effect. The PLBs effectively graduated the one Dutch mortgage provider that had not requested aid, from a competitive to a collusive price leader. Unlike in neighboring countries, where mortgage rates did follow the total costs of attracting funds down, in The Netherlands no competition between banks not operating under a PLB remained. The paper characterizes competitive and collusive price leadership equilibria in a model of price-leadership in banking based on Rotemberg and Saloner (1986). The leader has superior market information, which followers deduce from prices. We show that anticipation of the PLBs widens the space of delta’s for which the collusive price leadership equilibrium in this game becomes stable. The banks under a PLB price cautiously high in the grim trigger strategy, in order to avoid violating the PLB at a fine, which makes deviation less attractive.

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