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Competition Policy for Modern Banks

Author

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  • Mr. Lev Ratnovski
Abstract
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.

Suggested Citation

  • Mr. Lev Ratnovski, 2013. "Competition Policy for Modern Banks," IMF Working Papers 2013/126, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/126
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    References listed on IDEAS

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    2. E. Gaffeo & M. Molinari, 2016. "Macroprudential consolidation policy in interbank networks," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 77-99, March.
    3. Aadil Nakhoda, 2013. "Bank Competition and Export Diversification," EERI Research Paper Series EERI RP 2013/12, Economics and Econometrics Research Institute (EERI), Brussels.
    4. Duca, John V., 2016. "How capital regulation and other factors drive the role of shadow banking in funding short-term business credit," Journal of Banking & Finance, Elsevier, vol. 69(S1), pages 10-24.
    5. Malgorzata Olszak, 2015. "The phenomenon of excessive procyclicality of the financial sector from the perspective of macroprudential policy – sources, methods of reduction and their basic limitations (Zjawisko nadmiernej procy," Problemy Zarzadzania, University of Warsaw, Faculty of Management, vol. 13(55), pages 72-96.
    6. Malgorzata Pawlowska, 2015. "Changes in the size and structure of the European Union banking sector-the role of competition between banks," NBP Working Papers 205, Narodowy Bank Polski.
    7. Balázs Égert & Antoine Goujard, 2014. "Strengthening Competition in Poland," OECD Economics Department Working Papers 1125, OECD Publishing.
    8. Pawlowska, Malgorzata, 2016. "Does the size and market structure of the banking sector have an effect on the financial stability of the European Union?," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 112-127.
    9. Mullineux, Andy, 2014. "Banking for the public good," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 87-94.

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