Competition Policy for Modern Banks
21 Pages Posted: 18 Jun 2013
Date Written: May 2013
Traditional bank competition policy seeks to balance efficiency with incentives to take risk. The main tools are rules guiding entry/exit and consolidation of banks. This paper seeks to refine this view in light of recent changes to financial services provision. Modern banking is largely market-based and contestable. Consequently, banks in advanced economies today have structurally low charter values and high incentives to take risk. In such an environment, traditional policies that seek to affect the degree of competition by focusing on market structure (i.e. concentration) may have limited effect. We argue that bank competition policy should be reoriented to deal with the too-big-to-fail (TBTF) problem. It should also focus on the permissible scope of activities rather than on market structure of banks. And following a crisis, competition policy should facilitate resolution by temporarily allowing higher concentration and government control of banks.
Keywords: Banking, Banks, Competition, Risk management, competition, Competition Policy, Macroprudential Policy, Systemic Risk., competition policy, banking, bank competition, mergers, degree of competition, competitive advantage, higher concentration, bank stability, regulatory standards, banking services, bank business, bank mergers, net interest margin, competition policies, bank incentives, bank risk, competition authority, optimal degree of competition, competition authorities, bank risk-taking, banking system, banking business, bank market, barrier to entry, investment banking, bank regulation, merger, imperfect competition, market competition, market concentration, bank assets, bank distress
JEL Classification: G20, G24, G28
Suggested Citation: Suggested Citation