Journal Article

Competition in the Financial Sector: Overview of Competition Policies

Stijn Claessens

in The World Bank Research Observer

Published on behalf of World Bank

Volume 24, issue 1, pages 83-118
Published in print February 2009 | ISSN: 0257-3032
Published online April 2009 | e-ISSN: 1564-6971 | DOI: http://dx.doi.org/10.1093/wbro/lkp004
Competition in the Financial Sector: Overview of Competition Policies

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  • Regulation and Industrial Policy
  • Financial Regulation
  • Economics
  • Market Structure, Firm Strategy, and Market Performance

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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

Journal Article.  14732 words.  Illustrated.

Subjects: Regulation and Industrial Policy ; Financial Regulation ; Economics ; Market Structure, Firm Strategy, and Market Performance

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