27 Dec 2023

Troubles in Paradise: Oligopoly in the Belgian Banking Sector

An (Un)expected Oligopoly

At the end of October, the Belgian Competition Authority (L’Autorité belge de la Concurrence) (“ABC”) released an opinion on the state of competition in Belgium’s retail banking market (the “Opinion”).  The Opinion revealed that the retail banking market in Belgium is an oligopoly.  Four banks dominate the market: BNP Paribas Fortis, KBC, Belfius, and ING.

As an oligopoly, the retail banking market exhibits specific characteristics.   These include similar services on offer and frequent interactions between banks, facilitating coordination among the most prominent market participants and reducing competition.  The most obvious example of services with identical commercial terms is savings accounts with similar interest rates.

The ABC investigated interest rates for savings accounts.  They concluded that the average interest rate in savings in the country’s four largest banks has historically and systematically been lower than in other (smaller) banks.  An analysis from June 2022 to May 2023 showed that the transmission of the European Central Bank’s deposit rate to savings rates was slow and incomplete in Belgium.  The transmission rate in Belgium, at 12%, stood significantly lower than the eurozone average (20%) and that of Belgium’s neighboring countries (36% for Luxembourg, 35% for France, 26% for the Netherlands, and 20% for Germany).  Experts attribute this weak and delayed impact to the retail banking market’s lack of effective competition.

The Belgian interest rate system for savings accounts differs from other EU countries.  It features a dual-rate mechanism (base rate and loyalty bonus) and a complex interest calculation method.  Additionally, banks in Belgium use savings deposits to finance mortgage loans, mostly at fixed rates.  This financing practice also impacts the delayed and limited increase in savings interest rates, as higher rates on savings reduce banks’ yields from mortgage loans.

The Opinion identifies several obstacles to competition in the retail banking market, including non-transparency and high market entry barriers.  On the demand side, barriers include information asymmetry, lack of client transparency, low customer mobility, low price elasticity of demand, and absence of countervailing buyer power.  Various regulatory barriers also make entering or expanding in this sector difficult, increasing the market power of existing banks and discouraging new participants.

The Proposed Measures

The ABC has proposed several measures to stimulate competition in response to the observed situation.  The actions intend to promote competition only within the current market (oligopolistic) structure.

The first proposed measure emphasizes the necessity of improving client awareness.  The lack of transparency discourages clients from comparing bank offers.  Consequently, enhancing transparency will encourage clients to choose more favorable options.  The current fragmentation of information makes it challenging for clients to research the best offers proactively.  A centralized system with a dedicated platform would overcome this obstacle.

The second measure addresses simplifying administrative restrictions when switching banks.  Currently, users of savings accounts can change banks.  However, administrative and technical limitations involved in switching banks hinder mobility and induce client inertia.  To overcome this problem, the ABC proposes establishing an interbank mobility system using the IBAN identifier.  This way, clients can retain their account number and transaction history.  Such a measure is handy because clients will not have to inform their creditors about the change of account or bank.

The third measure recommends the complete elimination of loyalty bonuses.  Namely, as noted by the ABC, loyalty bonuses are unique to the Belgian banking sector and do not exist in other EU countries.  In practice, the conditions for obtaining loyalty bonuses are unclear to clients, and the loyalty bonus complicates the comparison between different bank offers.  The ABC has observed that banks manipulate these bonuses to promote a higher interest rate than they offer.  This results in inelastic demand, making interbank mobility very challenging.  Consequently, clients remain loyal to one bank for fear of losing the right to the bonus.  A milder measure could be to retain loyalty bonuses with guaranteed transparency and simplified conditions.

The fourth measure aims to create tax neutrality for investment and savings financial products.  In Belgium, interest on savings accounts is tax-free up to EUR 980; beyond that, the tax rate on interest is 15%.  Such a tax regime favors savings deposits over other financial products, reducing competition among banks.  Therefore, tax neutrality among different financial products would increase choices for savers and enhance competition among banks.

The fifth measure promotes alternative forms of investment.  For example, very popular investments in Belgium are one-year maturity government bonds with a yield of 3.30%.  Moreover, Belgian government bonds were specifically issued to compete with savings deposits, whose interest rates were between 0.50% and 0.90% at the time of the first bond issuance (August 2023).

The sixth measure involves the obligation to separate financial products.  Specifically, banks currently tend to sell certain financial products as a “package.”  Some banks restrict transfers from savings accounts to current accounts opened in their banks.  Offering financial products as a “package” hinders competition in the market by tying consumers to one institution, making any later incentives for competitive behavior primarily futile.  Although already contrary to competition protection regulations, this practice must be stopped by additional measures.

The last measure proposes closer cooperation between the ABC and regulatory bodies overseeing the operations of banks.  The investigative powers of the ABC, coupled with the expertise of regulatory bodies, will enable effective suppression of non-competitive behavior.

Awaiting the Commencement of Proceedings

Despite presenting its analysis in an 83-page Opinion, the ABC has not yet initiated proceedings against the four banks.  However, it plans to monitor the market for possible collusion.

What is the situation in Serbia?

In the past 11 years, savings denominated in dinars in Serbia have increased more than six times, reaching 116.4 billion dinars in September of this year.  Interestingly, savings in dinars are not subject to taxation.  Savings in euros are taxed at a rate of 15%.  This consequently affects the popularity of saving in the domestic currency.

The average interest rate for one-year fixed-term savings in dinars in Serbia is 3.41%, while for one-year fixed-term savings in euros, it is 1.61%.  This represents a significant increase compared to the previous year.  These were considerably lower – 1.92% for fixed-term savings in dinars for up to one year and 0.70% for euros.


Authors: Vuk Leković, Miloš Petaković, Dušan Jablan