Recently, a flurry of bankruptcies among non-bank financial intermediaries (NBFIs) in the USA has drawn attention to the risks associated with alternative credit channels in the shadow-banking sector – lending which is not financed with deposits. There is concern that this could be the start of a wave of bankruptcies among such NBFIs, especially given concerns about a potential downswing in the economic cycle – a time when defaults are more likely.
While providing alternative sources of funding, the opacity of lending in the shadow-banking sector means it is not clear what risks NBFIs face themselves and, more significantly, what risks they pose to the financial system as a whole. There is particular concern about the impact on regulated banks.
Already, JP Morgan Chase in its third quarter earnings report announced a $170m charge stemming from the bankruptcy of Tricolor, which specialised in sub-prime car financing. Mid-sized banks, Western Alliance and Zions Bancorp, have reported losses from loans to a group of distressed real estate funds. This has highlighted the interconnectedness between NBFIs and regulated banking, and the potential for problems in the shadow-banking sector to have a direct impact on mainstream banks.
In this blog, we will trace the secular trends in the financial systems of more advanced economies which have given rise to alternative credit channels and, in turn, to potential banking crises. We will explain the relationship between regulated banks and shadow banks, analysing the risks involved, the potential impact on the financial system and the policy implications.
What are the secular trends in banking?
The traditional model of commercial banking involved taking deposits and using them to finance loans to households and firms. However, cycles of banking crises, regulatory changes and financial innovation over the past 50 years produced new models.
First, banks diversified away from direct lending to providing other banking services – on-balance sheet activities, such as investing in financial securities, and off-balance sheet activities, such as acting as agents in the sale of financial securities.
Second, alternative credit channels based on financial markets have grown in significance.
In the 1980s, international regulations around traditional banking activities – taking deposits and making loans – were being formalised by the Bank for International Settlements (BIS) under what became known as the Basel framework (see, for example, Economics section 18.2 or Economics for Business section 28.2). For the first time, this stipulated liquidity and capital requirements for international banks relating to their traditional lending activities. However, at the same time the deregulation of financial markets and financial innovation provided banks with opportunities to derive revenues from a range of other financial services.
After the financial crisis, liquidity and capital requirements for banks were tightened further through the Basel III regulations. Commercial banks had to have even higher levels of capital as a buffer for bad debts associated with direct lending. A higher level of capital to cover potential losses increases the marginal cost of lending, since each pound of additional loan requires additional capital. This reduced the marginal return, and consequently, the incentive to lend directly.
These regulatory developments created an incentive to pursue activities which do not require as much capital, since their marginal cost is lower and potential return is higher. Consequently, banks have placed less emphasis on lending and more on purchasing short-term and long-term financial securities and generating non-interest income from off-balance sheet activities. For instance, research by the Bank of England found that during the 1980s, interest income accounted for more than two-thirds of total income for large international banks. In contemporary times, non-interest income tends to be greater than interest income. Figure 1 illustrates the declining proportion of total assets represented by commercial and consumer loans for all regulated US banks. (Click here for a PowerPoint.)
With banks originating less lending, activity has migrated to different avenues in the shadow-banking sector. This sector has always existed, but deregulation and financial innovation created opportunities for the growth of shadow banking – lending which is not financed with deposits. Traditionally, non-bank financial intermediaries (NBFIs), such as pension funds, hedge funds and insurance companies, use funds from investors to buy securities through financial markets. However, new types of NBFIs have emerged which originate loans themselves, notably private credit institutions. As Figure 2 illustrates, a lot of the expansion in the activities of NBFIs has been the due to increased lending by these institutions (defined as ‘other financial institutions (OFIs)). Note that the NBFI line includes OFIs. (Click here for a PowerPoint.)
Since, NBFIs operate outside conventional regulatory frameworks, their credit intermediation and maturity transformation are not subject to the same capital requirements or oversight that banks are. As a result, they do not need to have the same level of capital to insulate against loan losses. Therefore, lending in the shadow-banking sector has a lower marginal cost compared to equivalent lending in the banking sector. Consequently, it generates a higher rate of return. This can explain the large growth in the assets of OFIs illustrated in Figure 2.
Risks in shadow banking
Banking involves trade-offs and this is the case whether the activities happen in the regulated or shadow-banking sector. Increasing lending increases profitability. But as lending continues to increase, at some point the risk-return profile becomes less favourable since institutions are lending to increasingly higher-risk borrowers and for higher-risk projects.
In downturns, when rates of defaults rise, such risks become apparent. Borrowers fail and default, causing significant loan losses for lenders. With lower levels of capital, NBFIs will have a lower buffer to insulate investors from these losses, increasing the likelihood of default.
Is this a problem? Well, for a long-time regulators thought not. It was thought that failures in the shadow-banking sector would have no implications for deposit-holders in regulated banks and the payments mechanism. Unfortunately, current developments in the USA have highlighted that this is unlikely to be the case.
The connections between regulated and shadow banking
The financial system is highly interconnected, and each successive financial crisis has shown that systemic risks lurk in obscure places. On the face of it, NBFIs appear separate from regulated banks. But banks’ new business models have not removed them from the lending channel, merely changed their role. Short-term financing used to be conducted and funded by banks. Now, it is conducted by NBFIs, but still financed by banks. Long-term loan financing is no longer on banks’ balance sheets. However, while the lending is conducted by NBFIs, it is largely funded by banks.
NBFIs cannot be repositories of liquidity. Since they do not have deposits and are not part of the payments system, they have no access to official liquidity backstops. So, they do so indirectly by using deposit-taking banks as liquidity insurance. Banks provide this liquidity in a variety of ways:
- Investing in the securities issued by private capital funds;
- Providing bridge financing to credit managers to securitise credit card receivables;
- Providing prime broker financing to a hedge fund engaged in proprietary trading.
Furthermore, banks have increasingly made loans to NBFIs. Data for US commercial banks lending to the shadow-banking sector are publicly available only since 2015. But, as Figure 3 illustrates, it has seen a steady upward trend with a surge in activity in 2025. (Click here for a PowerPoint.)
Banks had an incentive to diversify into these activities since they are a source of revenue requiring less regulatory capital. The model requires risk and return to follow capital out of the banking system into the shadow-banking sector. However, while risky capital and its associated expected return have moved in the shadow-banking system, not all of the liquidity and credit default risk may have done so. Ultimately, some of that risk may be borne by the deposit-holders of the banks.
This is not an issue if banks are fully aware of the risks. However, problems arise when banks do not know the full risks they are taking.
There are reasons why this may be the case. Credit markets involve significant asymmetric information between lenders and borrowers. This creates conditions for the classic problems of moral hazard and adverse selection.
Moral hazard is a hidden action problem, whereby borrowers take greater risks because they share the possible downside losses with the lender. Adverse selection is the hidden information problem, whereby lenders do not have full information about the riskiness of borrowers or their activities.
The economics of information suggests that banks exploit scale, scope and learning economies to overcome the costs associated with asymmetric information in lending. However, that applies to direct lending when banks have full information about credit default risk on their loan book. When banks finance lending indirectly through NBFIs, there is an extension of the intermediation chain, and while banks may know the NBFIs, they will have much less information about the risks associated with the lending they are ‘underwriting’. This heightens their problems of asymmetric information associated with credit default risk.
What are the risks at present?
The level of debt in the global economy is at unprecedented levels. Data from the International Monetary Fund (IMF) show that it rose to $351 trillion dollars in 2024, approximately 235% of weighted global gross domestic product (GDP). It is in this environment that private credit channels through NBFIs have been expanding. With this, it is more likely that NBFIs’ trade-off between credit risk and return has tilted greatly in favour of the former. Some point to the recent collapse of Tricolor and First Brands – both intermediary financing companies funded by private credit – as evidence of elevated levels of risk.
Many are pointing out that the failures observed in the USA so far have a whiff of fraud associated with them, with suggestions of multiple loans being secured against the same working capital. However, such behaviour is symptomatic of ‘late-cycle’ lending, where the incentive to squeeze more profit from lending in a more competitive environment leads to short-cuts – short-cuts that banks, at one stage removed along the intermediation chain, will have less information about.
It is in a downturn that such risks become apparent. Widening credit spreads and the reduced availability of credit causes financial stress for higher-risk borrowers. Inevitably, that higher risk will lead to higher defaults, more provision for loan losses and write-downs in the value of loan assets.
While investors in NBFIs are first in line to bear the losses, they are not the only ones exposed. At moments of stress, the credit lines that banks have provided get drawn and that increases the exposure of banks to the risks associated with NBFIs and whoever they have lent to. As NBFIs fail, the financing provided by banks will not be repaid and they will thus have to absorb losses associated with the lending of the NBFIs. So, while it appears that risk has left the banking system, it hasn’t. Ultimately, the liquidity and credit default risk of the non-bank sector is financed by bank deposits.
Furthermore, the opaqueness of the exposure of banks to risks in the shadow-banking sector may have issues for the wider financial system. In 2008, banks became wary of lending to each other during the financial crisis because they didn’t know the exposure of counterparty institutions to losses from securitised debt instruments. Now, as more and more banks reveal exposures to NBFIs, concerns about the unknown position of other banks may produce a repeat of the credit crunch which occurred then. A seizing up of credit markets will worsen any downturn. However, unlike 2008, the financial resources available to central banks and governments to deal with any consequences are severely limited.
Only time and the path of the US economy will reveal the extent of any contagion related to lending in the shadow-banking sector. However, central banks are already worried about the risks associated with the shadow-banking sector and have been taking steps to identify and ameliorate them. Events in the USA over the past few weeks may accelerate the process and bring more of that lending within the regulatory cordon.
Articles
- Bank chief says US firm collapses ring ‘alarm bells’
BBC News, Michael Sheils McNamee (21/10/25)
- BoE finds non-bank financial firms pose wider risks in crisis periods
Reuters, Lawrence White (2/12/24)
- Global Debt Remains Above 235% of World GDP
IMF Blogs, Vitor Gaspar, Carlos Eduardo Goncalves and Marcos Poplawski-Ribeiro (17/9/25)
- IMF sounds alarm about high global public debt, urges countries to build buffers
Reuters, Andrea Shalal (15/10/25)
- Major international banks performance 1980-91
Quarterly Bulletin 1992 Q3, Bank of England (1/9/92)
- Shadow Banking System: Definition, Examples, and How It Works
Investopedia, Michael Bromberg (18/10/24)
- What is private credit, and should we be worried by the collapse of US firms?
The Guardian, Kalyeena Makortoff (18/10/25)
Academic paper
Data
Questions
- Explain why the need to hold more capital raises its cost for banks.
- Why does this reduce the lending they undertake?
- What is the attraction of ‘off-balance sheet transactions’ for regulated banks?
- Analyse the asymmetric information that banks face when providing liquidity to non-bank financial institutions (NBFIs).
- Examine the dangers for the financial system associated with regulated banks’ exposure to NBFIs?
- Discuss some policy recommendations regarding bank lending to NBFIs.
Examples of rent seeking in economic theory
In March 2024, two people were convicted of running a business that used dishonest and illegal methods to buy and sell tickets for popular live events such as Ed Sheeran, Lady Gaga and Little Mix concerts. Between June 2015 and December 2017, this business purchased 47 000 tickets using 127 names and 187 different e-mail addresses.
Economists refer to these actions as examples of rent seeking. However, many rent-seeking activities are not illegal.
What is rent seeking?
Rent seeking in economic theory refers to costly actions taken by people (i.e. they involve effort and expertise) to try to gain a greater share of a given level of profit /surplus. These actions do not generate any extra surplus or value for society and typically involve people trying to game or manipulate a situation or system for their own personal gain.
In many cases, the opportunity cost of these actions can be considerable. In this case, the opportunity cost is the surplus for society that could have been gained if this effort/expertise had been used to carry out more productive tasks.
A widely cited example of rent seeking is where firms exert time and effort to try to influence government policy through lobbying. Most lobbying activities in the UK are not illegal.
Non-price allocation
When prices are set below the market-clearing rate, by either the government or a private organisation, the quantity demanded of the good/service will exceed the quantity supplied. Therefore, non-price allocation must play a role. In other words, some method other than willingness to pay the price, must be used to determine which consumers receive the goods.
In some instances, such as visits to the GP or places at state schools, the good or service has a zero monetary price. In these cases. non-price allocation methods completely replace the role of the price in determining which consumers obtain the goods/services.
In other examples, a positive monetary price is set, but below the market-clearing rate. In these cases, the price partly determines who get the good/service (i.e. people must be willing to pay the non-market-clearing price), but non-price allocation also plays a role. The further below the market-clearing level the price is set, the greater the potential role for non-price methods.
Some common methods of non-price allocation include:
- First-come first served. This typically results in some type of queueing, either in person or online (a virtual queue).
- A random selection process. For example, some goods/services are allocated via a lottery, with names of consumers being randomly drawn.
- The government or other public bodies in charge of allocating the good develop a set of rules to determine which consumers/people get the good. For example, when allocating places at popular state schools, priority is often given to children who live close to the school (i.e. in the catchment area) or who live in families with certain religious beliefs.
Examples of rent seeking
When non-price methods of allocation are implemented, can consumers engage in activities that increase their chances of getting hold of the good/service? Can they manipulate the system for their own advantage and gain a greater share of any surplus? This is rent seeking.
A survey carried out in January 2025 provides some interesting evidence of rent-seeking actions taken by parents to try to secure a place for their child at a popular school. Twenty-seven per cent of the respondents admitted they had tried to manipulate the system to get their child into their preferred school. Out of those who admitted attempting to manipulate the system:
- 30 per cent registered a child at either another family member’s or friend’s address that was closer to a popular school.
- 25 per cent exaggerated religious beliefs and attended church services to try to secure a school place.
- 9 per cent temporarily rented a second home inside the catchment area for the school.
- 7 per cent moved into the catchment area for the application, only to move out once their child’s place was secured.
Some of these actions may be dishonest but are not illegal.
Rent-seeking activities in the ticketing market for live events
In the primary market for tickets, prices for popular live events are often set below market-clearing levels. Therefore, non-price methods, such as first come, first served, are used to allocate the tickets. This typically results in some type of queueing. Rent-seeking activities include actions taken by consumers to increases their chances of getting nearer to the front of the queue.
If the tickets are being sold from a physical outlet (i.e. a sales kiosk), then some consumers may start queueing many hours before the kiosk opens – in some cases camping overnight. An example is the ‘The Queue’ for Wimbledon tennis matches. Rather than queueing themselves, some people might pay others to queue on their behalf.
People who are paid to queue are sometimes referred to as a ‘line stander’, ‘queue stander’, ‘line sitter’ or ‘queue professional’. Line standers offer their services via market platforms, such as TaskRabbit.
When tickets are sold online, non-market allocation includes both queuing and random selection. Typically, people have to create an account with the primary market ticketing website (Ticketmaster, See Tickets, Eventbrite or AXS) before the sale begins. Then, using this account, they can enter an online waiting room around 15 minutes before the tickets are available to purchase. There is thus an element of first come, first served. When the sale starts, people in the waiting room are randomly allocated a place in the online queue. Once they reach the front of the online queue, the event organiser normally places limits on the number of tickets they can purchase.
What can people do to manipulate this system and so increase their chances of purchasing tickets? In other words, what are the possible rent-seeking activities? One possibility is to create multiple accounts using the details of friends/family and then join the waiting room with each of these accounts using separate devices. Professional resellers often try to use specialist software, called bots, that can create thousands of fake accounts and so significantly increase the chances of getting to the front of the queue. Once they get to the front of the queue, an account created by a bot can proceed through the purchasing process much faster than a person can. The tickets can then be sold for a profit in the uncapped secondary market via websites such as Stubhub and Viagogo.
The UK government passed a law in 2017 that made the use of bots to circumvent ticket purchase limits an illegal activity. The use of ticket bots in the EU became illegal in 2022. Primary market ticketing websites have also invested in technology that tries to detect and block the use of this type of software.
Government policy in the resale of tickets
Should the government prohibit the resale of tickets or implement a resale price cap to try to deter this rent-seeking activity?
Many economists would oppose this policy because of the benefits of the secondary market. For example, resale helps to reallocate tickets to those consumers with the highest willingness to pay. Therefore, the secondary-ticketing market can have a positive impact on allocative efficiency, but it comes at a cost – rent-seeking activities.
Research by economists published more than ten years ago found that the positive impact of the resale market on allocative efficiency outweighed the rent-seeking costs. However, developments in technology have increased the level of rent seeking in recent years, making it easier and less costly for professional resellers to purchase large amounts of tickets in the primary market. Therefore, it is possible that the rent-seeking cost of the secondary market now exceeds its positive impact on allocative efficiency. A case can thus be made for greater intervention by the government.
Recent accusations have also been made about possible rent-seeking activities by sellers in the primary ticketing market too, adding to concerns.
Some of the problems of implementing a resale price cap were discussed in a previous post: Ticket resales – is it time to introduce a price cap?
Articles
- Admission Impossible: Over a quarter of parents admit to ‘lying or bending’ rules to get their children into preferred schools
Zoopla (23/1/25)
- Diss ticket touts convicted in £6.5m reselling scheme
BBC News, Norfolk, Orla Moore & PA Media (13/3/24)
- These touts made millions – and claimed staff at big ticketing firms helped
BBC News, Chi Chi Izundu and James Stewart (12/6/25)
- Touts employ overseas workers to bulk-buy gig tickets
BBC News, Steffan Powell, Sian Vivian & Ben Summer (26/6/25)
- Online ticket touts jailed for fraud
National Trading Standards, News (17/5/24)
- Resale and Rent-Seeking: An Application to Ticket Markets
Review of Economic Studies, Phillip Leslie and Alan Sorensen (2014, 81, pp. 266–300)
- Ticketmaster, Live Nation face US suit over resale tactics
BBC News, Danielle Kaye (18/9/25)
Information
Questions
- Compare and contrast the meaning of the word ‘rent’ in everyday language with its use in economic theory.
- Give examples of some policies that a business might lobby the government to implement. What arguments might the business make to justify each of these policies?
- Outline some of the non-price methods that are used to allocate health care in the UK.
- Draw a demand and supply diagram to illustrate the incentives for rent-seeking activities when prices are set below market-clearing levels.
- Outline some potential rent-seeking activities by sellers in the primary ticketing market.
- Discuss some of the opportunity costs of rent-seeking activity in the market for tickets.
- Explain why the growing use of paid line standers might increase the demand for a good/service.
- Explain why the percentage of tickets for popular live events purchased by professional resellers has increased in the past 10 years.
Following the controversary over the sale of tickets for popular live events such as Taylor Swift’s Eras tour and the Oasis Live ’25 Tour, the government launched a consultation exercise in January 2025 on the resale of tickets. Titled, ‘putting fans first’, the exercise sought the views of individuals and organisations on a range of policy proposals. One of these was the implementation of a cap on the resale price of tickets.
The government is not only considering whether to implement a cap but also the level at which it might be set. The following question was included in the consultation exercise.
What is the maximum uplift that you think should be applied if ticket resales were to be subject to a price cap? Please state the reason for your selection.
• no uplift at all
• 10% or less
• between 10 and 20%
• between 20 and 30%
• other – please state
Some platforms such as Twickets and Ticketswap already cap resale prices on their platforms at between 5 and 10 per cent above the face value of the ticket. They are, therefore, less likely to be affected by any new price regulation unless the ‘no uplift at all’ option is chosen. On other platforms, such as Viagogo and Stubhub, resellers are free to list tickets at whatever price they choose. This is often referred to as the uncapped market, and tickets for the Oasis tour with a face value of £150 were listed on these websites for £14 000. The implementation of a price cap is likely to have a big impact on this part of the resale market. The chief executive of StubHub stated in June 2025 that the business would probably have to exit the UK if a cap was introduced.
Although many fans dislike the uncapped secondary ticketing market, most economists take a more positive view. They see them as a way of facilitating mutually beneficial trade and helping to reallocate tickets to those with the highest willingness to pay. This reduces levels of allocative inefficiency/deadweight welfare loss in the market.
Economists also tend to argue against the use of price controls in competitive markets because of their negative impact on supply. If price controls reduce the available returns to sellers, they have an incentive to do something else with their time/resources i.e. switch to supplying other goods and services in markets not subject to price controls. This reduces supply in the regulated market and so could have a negative impact on consumer surplus.
What are the issues with the secondary market?
Given the benefits outlined by economists of having an uncapped secondary ticketing, why is the government considering the implementation of a price cap? One potential issue of having an uncapped secondary ticketing market is that developments in technology make it easier for professional resellers to buy very large quantities of tickets. This makes it increasingly difficult for fans who want to attend the event from being able to purchase a ticket.
Reports also suggest that professional resellers use illegal methods to both mass purchase and resell tickets. For example, to overcome any limits on sales imposed by the sellers in the primary market, some use automated software, fake IDs and multiple credit cards. Two people convicted of fraudulent trading in 2024 were found to have bought 47 000 tickets over a 212-year period, using 127 names and 187 different e-mail addresses.
Some resellers have also acted in ways that do not comply with consumer law when advertising tickets for sale. For example, not providing information such as the ticket number and other details about where the seat is located i.e. the block/area and row.
These rent seeking activities by professional resellers could outweigh the positive impact of uncapped secondary market on allocative efficiency.
Implementing a resale price cap would reduce the incentives for professional resellers to purchase large quantities of tickets and engage in these rent-seeking activities. However, in the consultation document the government recognises that the implementation of a resale price cap would be a ‘significant and complex intervention’.
An important implementation issue
To calculate the resale price cap for any live event, the original price of the ticket in the primary market needs to be known. This raises an interesting question – should the cap apply to the initial face value of the ticket or the total price the customer pays?
The face value of the ticket may only represent a proportion of the actual cost of buying a ticket because of the widespread use of drip pricing. This is the practice of applying additional fees as the consumer proceeds through the online purchasing process. These fees can sometimes add around 25 per cent and more to the price of a ticket. In the consultation document, the government suggested that the cap should apply to the face value of the ticket plus all compulsory fees.
One issue raised in the response to the consultation by the Competition and Markets Authority is that these fees are not always made clear by sellers in the primary market in a clear and transparent way. Therefore, for the policy to be effective, primary market sellers would have to make information on both ticket prices and any fees clearly and easily available. Recent changes to the law that prohibit drip pricing might help to address this issue.
The potential impact of a resale price cap on fraud
To avoid the price cap, there is a danger that increasing numbers of buyers and sellers stop using capped secondary ticket platforms, where activity is easier to observe/regulate, and switch to other non-specialist platforms where detection of illegal behaviour and enforcement of consumer law is more difficult. Examples of non-specialist platforms where sales might increasingly take place include Facebook Marketplace, Instagram Shop, X (formerly Twitter) and internet forums. With lower levels of consumer protection and the greater difficulty of detecting illegal behaviour, sales via these non-specialist platforms are more vulnerable to scams and fraud.
When referring to the impact of a resale price cap, the chief executive of StubHub argued that:
It will have a massive negative impact on consumers. It’s not like the demand is going to go away, it’s just going to move somewhere else, and that somewhere else is going to be the black market [where] consumers aren’t protected.
To test the hypothesis that price controls lead to greater incidences of fraud, one study used polling data to compare ticket fraud rates in the UK with Victoria, Australia and Ireland. In 2009, the state government of Victoria made it illegal for tickets to be resold for more than 10 per cent of their face, while the Irish government introduced the Sale of Ticket Act in 2021 that prohibited the resale of tickets above their original price. The study found that the proportion of respondents who reported being victims of ticket fraud over the previous two years was around four times higher in Victoria and Ireland than the UK. The most common sales channel where consumers experienced ticket fraud in all three countries were social media platforms.
Another example of the potential impact of the price cap in Ireland on fraud relates to the first ever regular-season NFL game that is being played in Dublin on 28 September 2025 between the Pittsburgh Steelers and the Minnesota Vikings. The online bank, Revolut, reported an 80 per cent increase in the number of ticket scams when tickets for this game went on sale.
In response to the consultation exercise, the Competition and Markets Authority backed the implementation of a resale price. It will be interesting to see if the government goes through with the measure in the next few months.
Consultation
Articles
Blogs on this site
Questions
- Why might event organisers set ticket prices below the market clearing rate? Illustrate the impact of setting prices below market clearing rates on consumer, producer and total surplus in the primary market for tickets.
- Using a demand and supply diagram, explain how the uncapped secondary ticket market could reduce deadweight welfare loss. Discuss any assumptions you have made about the allocation of tickets among potential buyers in the primary market (i.e. sorting).
- Is it possible for professional resellers to continue making a profit if tickets are sold at market clearing rates in the primary market? Explain your answer.
- Under what circumstances would a maximum price set below the market clearing rate in a competitive market have a negative impact on consumer surplus? Draw a diagram to illustrate your answer.
- Using examples, explain what is meant by ‘rent seeking’ in economic theory.
Outline some of the recent updates to the law on pricing information that businesses must show customers.
- What policies, other than a resale price cap, could the government introduce to try to address some of the issues with the ticketing market for live events?
In a blog in October 2024, we looked at global uncertainty and how it can be captured in a World Uncertainty Index. The blog stated that ‘We continue to live through incredibly turbulent times. In the past decade or so we have experienced a global financial crisis, a global health emergency, seen the UK’s departure from the European Union, and witnessed increasing levels of geopolitical tension and conflict’.
Since then, Donald Trump has been elected for a second term and has introduced sweeping tariffs. What is more, the tariffs announced on so-called ‘Liberation Day‘ have not remained fixed, but have fluctuated with negotiations and threatened retaliation. The resulting uncertainty makes it very hard for businesses to plan and many have been unwilling to commit to investment decisions. The uncertainty has been compounded by geopolitical events, such as the continuing war in Ukraine, the war in Gaza and the June 13 Israeli attack on Iran.
The World Uncertainty Index (WUI) tracks uncertainty around the world by applying a form of text mining known as ‘term frequency’ to the country reports produced by the Economist Intelligence Unit (EIU). The words searched for are ‘uncertain’, ‘uncertainty’ and ‘uncertainties’ and the number of times they occur as percentage of the total words is recorded. To produce the WUI this figure is then multiplied by 1m. A higher WUI number indicates a greater level of uncertainty.
The monthly global average WUI is shown in Chart 1 (click here for a PowerPoint). It is based on 71 countries. Since 2008 the WUI has averaged a little over 23 000: i.e. 2.3 per cent of the text in EIU reports contains the word ‘uncertainty’ or a close variant. In May 2025, it was almost 79 000 – the highest since the index was first complied in 2008. The previous highest was in March 2020, at the start of the COVID-19 outbreak, when the index rose to just over 56 000.
The second chart shows the World Trade Uncertainty Index (WTUI), published on the same site as the WUI (click here for a PowerPoint). The method adopted in its construction therefore mirrors that for the WUI but counts the number of times in EIU country reports ‘uncertainty’ is mentioned within proximity to a word related to trade, such as ‘protectionism’, ‘NAFTA’, ‘tariff’, ‘trade’, ‘UNCTAD’ or ‘WTO.’
The chart shows that in May 2025, the WTUI had risen to just over 23 000 – the second highest since December 2019, when President Trump imposed a new round of tariffs on Chinese imports and announced that he would restore steel tariffs on Brazil and Argentina. Since 2008, the WTUI has averaged just 2228.
It remains to be seen whether more stability in trade relations and geopolitics will allow WUI and WUTI to decline once more, or whether greater instability will simply lead to greater uncertainty, with damaging consequences for investment and also for consumption and employment.
Articles
- IMF World Economic Outlook: economic uncertainty is now higher than it ever was during COVID
The Conversation, Sergi Basco (23/4/25)
- Economic uncertainty hits new high
McKinsey, Sven Smit et al. (29/5/25)
- Trade tensions and rising uncertainty drag global economy towards recession
UNCTAD News (25/4/25)
- IMF Warns Global Economic Uncertainty Surpasses Pandemic Levels
The Global Treasurer (24/4/25)
- Britons ‘hoarding cash amid economic uncertainty and fear of outages’
The Guardian, Phillip Inman (10/6/25)
- America’s Brexit Phase
Foreign Affairs, Jonathan Haskel and Matthew J. Slaughter (10/6/25)
- Goldman Sachs’ CEO on the ‘Big, Beautiful Bill,’ Trump’s Tariffs and Economic Volatility
Politico, Sam Sutton (13/6/25)
- The Countries Where Economic Uncertainty Is Rising Fastest
24/7 Wall St., Evan Comen (9/6/25)
- Trump’s tariffs have finally kicked in, so what happens next?
The Conversation, Maha Rafi Atal (8/8/25)
Uncertainty Indices
Questions
- Explain what is meant by ‘text mining’. What are its strengths and weaknesses in assessing business, consumer and trade uncertainty?
- Explain how the UK Monthly EPU Index is derived.
- Why has uncertainty increased so dramatically since the start of 2025?
- Compare indices based on text mining with confidence indices.
- Plot consumer and business/industry confidence indicators for the past 24 months, using EC data. Do they correspond with the WUI?
- How may uncertainty affect consumers’ decisions?
The Digital Markets Act (DMA) outlines a new regulatory approach that the European Commission (EC) is taking to address concerns over the lack of competition in digital platform markets. The DMA complements existing European Union competition law and officially came into force on 1st November 2022.
In the first stage of this new regulatory approach, the EC identified ten core platform services (CPS). Examples include search engines, online social networking services, video sharing services, cloud computing services, web browsers and operating systems. These services act as important gateways for large numbers of businesses and consumers to interact with one another. They also have some important economic characteristics, such as large economies of scale and very strong network effects.
The next stage of the regulatory process was to assess which of the large established businesses should be designated as ‘gatekeepers’ of these CPS. To be judged as a gatekeeper, a business had to meet three qualitative criteria. Using quantitative thresholds as a guide to see if these qualitative criteria had been met, the following six companies were designated as gatekeepers by the EC in September 2023: Alphabet (Google’s parent company), Amazon, Apple, ByteDance (owner of TikTok), Meta (owner of Facebook) and Microsoft. Individual companies can be gatekeeper for more than one CPS. For example, Apple was judged to be a gatekeeper for both web browsers (Safari) and operating systems (iOS and iPadOS).
Rules and compliance
Once a business has been designated as a gatekeeper for one or more CPS, the DMA imposes a set of rules on its future conduct. Some of these rules refer to conduct that the business must follow, while others refer to types of behaviour that are prohibited. The EC sometimes refer to these rules as a list of “do’s” and “don’ts”.
One of the rules refers to interoperability. This is the degree to which different (a) software, (b) devices and (c) other applications can work seamlessly together (i.e. share functionality/data) without requiring any actions by the user (i.e. how compatible they are with one another).
For example, consider the degree of interoperability between the operating system of a gatekeeper, such as Apple, and other hardware/software services. One of the requirements of the DMA is for the gatekeeper to provide the same degree of interoperability for the hardware/software services provided by rival businesses as they do for similar hardware/software services they supply. This is sometimes referred to as the interoperability obligation.
Once a business is designated as a gatekeeper, it has 6 months to submit a compliance report to the EC that demonstrates how it is meeting the rules set out in the DMA. This should include descriptions of any changes the company has had to make to its conduct to meet the new requirements. Further compliance reports must then be submitted on an annual basis.
If, after assessing a compliance report, the EC suspects that a gatekeeper is still acting in ways that do not comply with the DMA, then it can launch either a non-compliance or specification procedure.
The case of Apple
Apple submitted its first compliance report on 7 March 2024. It was far less extensive than those completed by other designated gatekeepers and adopted a very different tone: it directly challenged the EC’s view that the DMA rules would have a positive impact on consumer welfare.
In September 2024, the EC launched its first two specification proceedings that focused on Apple’s compliance with the interoperability obligation.
The first of these proceedings opened a formal discussion with Apple over the interoperability between the iPhone operating system (iOS) and connected devices such as smartwatches and headphones. The proceeding identified nine features that gave the iOS greater functional compatibility with connected devices produced by Apple than with those made by other businesses. For example:
- Only users of connected devices produced by Apple can (a) receive iOS notifications that contain images or other attachments and (b) select the iOS notifications they want to appear on the device.
- Only users of Apple’s wireless headphones have intelligent audio switching functionality that allows them to switch automatically to the device playing the most relevant audio.
- The Airdrop function, which enables users to share files wirelessly between devices, only works if they are both produced by Apple.
- Only connected devices made by Apple have the functionality for high-bandwidth data transfer from an iPhone without having to rely on network or cellular connection. This is useful for gaming and AI services.
The second specification proceeding focused on the process developed by Apple to deal with requests from other businesses that wanted to develop hardware or software services that are compatible with the iOS.
On 18th December 2024, the EC informed Apple of its preliminary specification decisions and opened a consultation exercise with other interested parties about the suitability of its proposals. Once this process was completed, the EC informed Apple of its final specification decisions on 19 March 2025.
The EC’s decisions
The first decision included a set of measures that Apple must take to improve the interoperability of connected devices produced by other businesses with the iOS. The EC stated that:
The interoperability solutions for third parties will have to be equally effective to those available to Apple and must not require more cumbersome system setting or additional user friction.
The second decision outlined measures that Apple had to take to improve the process of dealing with requests for greater compatibility with the iOS. For example, it should provide outside businesses with more (a) access to technical documentation, (b) predictable timelines for the reviews and (c) timely updates.
Apple argued that being forced to introduce these measures will (a) create significant additional costs, (b) limit its ability to develop products that work seamlessly with one another and (c) lead to its having to share sensitive customer information with its rivals.
On 30th May 2025, Apple filed an appeal against the EC’s specification decisions to the General Court of the European Union. It will be interesting to see what judgment is made on this case by the General Court and the implications this has for the enforcement of the DMA.
Video
Articles
- The EU Digital Markets Act – The Holy Grail of Big Tech Regulation?
Morrison & Foerster, Andreas Grünwald, Christoph Nüßing and Theresa Oehm (19/7/22)
- Commission starts first proceedings to specify Apple’s interoperability obligations under the Digital Markets Act
EC Press Release (19/9/24)
- Apple hits out at Meta’s numerous interoperability requests
Reuters, Foo Yun Chee (19/12/24)
- 1st Anniversary of the Digital Markets Act (DMA): Lessons learned and road ahead
Hausfeld Competition Bulletin, Ann-Christin Richter and René Galle (28/3/25)
- EU accuses Google and Apple of breaking its rules, risking Trump clash
The Guardian, Rob Davies and Dan Milmo (19/3/25)
- Brussels takes action against Google and Apple despite Trump threat
Financial Times, Barbara Moens (19/3/25)
- Brussels Takes Action Against Google And Apple Despite Trump Threat
GNC (19/3/25)
- Commission provides guidance under Digital Markets Act to facilitate development of innovative products on Apple’s platforms
EC Press Release (19/3/25)
- European Commission Fines Both Apple, Meta For DMA Breaches
Silicon UK, Tom Jowitt (23/4/25)
- Apple Appeals European Commission Order on Interoperability With Competitors’ Products
PYMNTS (2/6/25)
- https://dig.watch/updates/apple-sues-european-commission-over-dma-interoperability-ruling
The Digital Watch (6/6/25)
- Meta, Apple Launch Legal Challenges to EU DMA Rulings
PYMNTS (3/6/25)
Questions
- Identifying core platform services is similar to defining relevant markets in standard competition policy but takes a more legalistic approach. Discuss some of the problems of defining a relevant market for a digital platform.
- Outline the three qualitative criteria and the quantitative thresholds that are used by the EC to designate a digital platform as a gatekeeper of a core platform service.
- Find an example of a digital platform that met the quantitative thresholds but did not meet the qualitative criteria and so was not designated as a gatekeeper.
- Find an example of a digital platform that did not meet the quantitative thresholds but did meet the qualitative criteria and so was designated as a gatekeeper.
- Interoperability is a type of conduct that is sometimes referred to as self-preferencing: i.e. behaviour by a digital platform that gives its own products/services preferential treatment over those provided by other firms that use the same platform. What other types of conduct are possible examples of self-preferencing?
- What is the difference between a non-compliance procedure and a specification procedure? Find some recent examples of non-compliance procedures that have been undertaken by the EC to enforce the DMA.
- What are the potential advantages and disadvantages for consumer welfare of the specification decisions made by the EC?
