Competition in the Financial Sector: Overview of Competition Policies
As in other sectors, competition in finance matters for allocative, productive and dynamic efficiency. Theory suggests, however, that unfettered competition is not first best given the special features of finance. I review these analytics and describe how to assess the degree of competition in markets for financial services. Existing research shows that the degree of competition greatly varies across markets, largely driven by barriers to entry and exit. I argue that changes in financial services industries require updated competition policies and institutional arrangements, but that practices still fall short. Furthermore, I show that developing countries face some specific competition challenges.
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access to ﬁnancial access to ﬁnancing agencies anti-competitive behavior approaches banking systems Basel II beneﬁts Berger Bikker and Spierdijk Caprio changes in ﬁnancial Claessens and Laeven competition issues competition measures competition policy complex concentration contestable markets cost of ﬁnancial degree of competition Demirguc-Kunt deregulation developing countries difﬁcult economic effective competition efﬁciency emerging markets entry and exit evidence example factors driving competition ﬁnancial institutions ﬁnancial intermediation ﬁnancial markets ﬁnancial sector ﬁnancial services industries ﬁnancial services provision ﬁnancial system ﬁnd ﬁndings ﬁrms ﬁrst foreign bank entry global H-statistics harmonization increased competition input prices institutional infrastructure intemational International Monetary Fund lead lending Levine liberalization literature lower cost market power market structure measurement of competition measuring competition monopolistic competition network effects network industries number of banks payments system proﬁts providers regulatory retail risks SMEs speciﬁc standards studies sub-prime lending sunk costs theoretical and empirical theory tradeoffs x-inefficiency