BANKS are engaging in “tacit collusion” to charge big fees during initial public offerings (IPOs), causing investors to miss out on the full value of flotations, according to an influential international economics body.
The Organisation for Economic Co-operation and Development (OECD) yesterday said the average cost for IPOs worth less than $100m (£78m) is as high as 11 per cent of the entire transaction.
The big fees are caused by a lack of competition among firms willing to underwrite equity financing, the OECD said in its outlook for business and finance.
Read more: New York wins big in global IPO boom
In a strongly worded report the Paris-based body accused the banking sector of anti-competitive practices which risk harming the productivity of the global economy.
“High levels of fees and parallel pricing (akin to tacit collusion) appear to have increased”, the report said.
Parallel pricing, when competing firms do little to move prices lower than rivals, leads to less competition and therefore less efficient resource allocation. However, improving the equity financing environment could lead to “better outcomes for globalisation”, the OECD added.
Equity raising is a key part of banks’ profits, with major international banks often making millions for linking investors to companies planning to list.
These profits are highly concentrated amongst the biggest banks, with the top 20 banks accounting for 63 per cent of global transaction volume in 2016, the OECD said. The top three banks accounted for 19 per cent. However, the situation has improved since the global financial crisis in the UK, with large banks receiving slightly less of the profits.
Meanwhile the OECD said bribery and corruption impose costs on the global economy equivalent to the entire output of the French economy every year, at up to three per cent of global GDP.