07 March 2009

Too big to fail?

Now that it is almost universally accepted that there are some business entities that are “too big to fail”, meaning that they are so big that their host societies cannot afford to let them fail, there would appear to be a new, very important question which governments ought to require competition authorities to address specifically when they consider large scale mergers and acquisitions.

When a business entity is too big to fail, the ultimate risk is assumed or heavily shared by the taxpayer, as we have seen in the case of AIG, Citigroup, the US automotive industry, Royal Bank of Scotland and Northern Rock.

So the question which should now be addressed by competition authorities when considering mergers and acquisitions is, “Will the proposed new entity be ‘too big to fail’, and if so, on what basis?”

The matter should be addressed case by case by means of an appropriate risk assessment methodology, identifying the hazard to which the taxpayer might be exposed, and assessing the likelihood and the consequence. This approach will not provide complete protection, but when considering large-scale mergers and acquisitions, governments should have clear and explicit advice on this aspect to enable an informed judgement to be made about the risk that the community is taking on.

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