What Is Patient Capital and Where Does It Exist? the Significance of Much Neglected Competition Regulation

The central feature of financial systems in coordinated market economies (CME) is called ‘patient capital’ which refers to the existence of block-holders arising from concentrated cross-ownership that ‘can protect company managers from the possibility of a hostile takeover, thus freeing them from obsessive concern with short-term market indicators’ (Culpepper, 2005: 175). In contrast, it is widely held that distinctive institutional diversity of Liberal Market (LMEs) rests upon ‘impatient capital’ or ‘stock market capitalism’ where structural incentive arrangements guiding firm behaviour throughout the financial system are based on short-term gains. This paper challenges this view with special reference to Australian and Canadian evidence.

Among the OECD countries, only in two LMEs, Australia and Canada, mergers among the largest domestic banks are prohibited by competition regulation and policy. This is an intentional action of the respective governments in the form of institutional complementarity which compensated for reduced competition in the oligopolistic Australian and Canadian banking sectors. But the Global Financial Crisis (GFC) has exposed an unintentional institutional complementarity aspect of this policy that reinforcedincentives for conservative banking behaviour and corporate governance. For example, in contrast to their peers, for example, in the US and UK, the largest bank executives in Australia and Canada did not feel the pressure to increase in size, higher return on equity or higher price earnings ratios than their competitors which would, otherwise, make them vulnerable to a hostile takeover. Accordingly, they did not have incentives reinforcing excessive risk-taking that could have damaged their financial soundness and financial stability in the long term.

Based on interview data and comparative qualitative analysis of bank merger policies that prohibited in-market mergers among the largest banks in Australia and Canada, this study argues that the restriction on such mergers was one of the institutional complementarities that contributed and reinforced prudent bank behaviour and systemic stability in Australia and Canada. Indeed, the competition regulation reinforced incentives that militated against extreme risk-taking behaviour of bank executives. This face of the mega bank merger policy is akin to so-called ‘patient capital’ in coordinated financial systems in CMEs that serve as a barrier to hostile takeovers that pressure bank managers to respond to short-term market pressures. In so doing, it contributes to debate on the sources of 'patient capital'.