Competition and Stability in BankingThe Role of Regulation and Competition Policy

Competition and Stability in BankingThe Role of Regulation and Competition Policy

Xavier Vives

Print publication date: 2018

ISBN: 9780691171791

Publisher: Princeton University Press

Abstract

Does too much competition in the banking sector hurt society? What policies can best protect and stabilize banking without stifling it? Institutional responses to such questions have evolved over time, from interventionist regulatory control after the Great Depression to the liberalization policies that started in the United States in the 1970s. The 2007–2009 crisis, which originated from an oversupply of credit, once again raised questions about excessive banking competition and what should be done about it. This book addresses the critical relationships between competition, regulation, and stability, and the implications of coordinating banking regulations with competition policies. The book argues that while competition is not responsible for fragility in banking, there are trade-offs between competition and stability. Well-designed regulations would alleviate these trade-offs but not eliminate them, and the specificity of competition in banking should be accounted for. It also asserts that regulation and competition policy should be coordinated, with tighter prudential requirements in more competitive situations, but it also shows that supervisory and competition authorities should stand separate from each other, each pursuing its own objective. The book reviews the theory and empirics of banking competition, drawing on up-to-date analysis that incorporates the characteristics of modern market-based banking, and he looks at regulation, competition policies, and crisis interventions in Europe and the United States, as well as in emerging and developing economies. Focusing on why banking competition policies are necessary, the book examines regulation's impact on the industry's efficiency and effectiveness.