Enhancing the Role of Competition in Regulation of Banks

The banking sector is one of the most closely regulated sectors of OECD economies. A reason advanced for this close regulation is that small depositors cannot compare risks (or have no incentive to do so, because of deposit insurance), so competition would lead banks to take excessive risks. Controls on risk taking are considered essential to ensure that competition between banks promotes efficient outcomes. Public policy concerns focus on how bank failures could affect small depositors, the payments system and the stability of the financial system as a whole. The goal of promoting or preserving competition might conflict with some actions to deal with bank failures, emergency measures or state aid for failing banks or implicit state support for large banks. In most OECD countries bank regulators and competition authorities are jointly responsible for bank mergers, so interaction and coordination between them are necessary. Because of the political and economic sensitivity of the banking sector, it is perhaps not surprising that some countries apply special competition regimes to it. This document comprises proceedings in the original languages of a Roundtable on Enhancing the Role of Competition in the Regulation of Banks which was held by the Working Party n°2 of the Committee on Competition Law and Policy in February 1998. This compilation, which is one of several published in a series named “Competition Policy Roundtables”, is issued to bring information on this topic to the attention of a wider audience.