Competition in the Financial Sector: Overview of Competition Policies

Posted: 6 May 2009

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2009

Abstract

Competition in the financial sector, as in other sectors, matters for allocative, productive, and dynamic efficiency. Theory suggests, however, that unfettered competition is not necessarily best given the special features of financial services. The author discusses these analytical complications before reviewing how to assess competition in the financial sector and its determinants. It is shown that competitiveness varies greatly across countries, in perhaps surprising ways, and that it is not driven by financial system concentration. Rather, systems with greater foreign entry and fewer entry and activity restrictions tend to be more competitive, confirming that contestability-the lack of barriers to entry and exit-determines effective competition. The author then analyzes how competition policy in the financial sector has generally been conducted and how changes in competition in the financial services industries should affect competition policy going forward. In part based on comparison with other industries, the author provides some suggestions on how competition policy in the financial sector could be better approached as well as what institutional arrangements best fit a modern view of competition policy in the sector. The specific competition challenges for developing countries is also highlighted. The author concludes that practices today fall far short of the need for better competition policy in the financial sector.

Keywords: G10, G18, G28, L1, L5

Suggested Citation

Claessens, Stijn, Competition in the Financial Sector: Overview of Competition Policies (February 2009). The World Bank Research Observer, Vol. 24, Issue 1, pp. 83-118, 2009. Available at SSRN: https://ssrn.com/abstract=1397939 or http://dx.doi.org/lkp004

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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