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Competition in the Financial Sector: Overview of Competition Policies

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  • Stijn Claessens

Abstract

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. Copyright The Author 2009. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank . All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/wbro/lkp004
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Article provided by World Bank Group in its journal The World Bank Research Observer.

Volume (Year): 24 (2009)
Issue (Month): 1 (April)
Pages: 83-118

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Handle: RePEc:oup:wbrobs:v:24:y:2009:i:1:p:83-118
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Cited by:

  1. Simplice Anutechia Asongu, 2014. "Knowledge Economy and Financial Sector Competition in African Countries," AAYE Policy Research Working Paper Series 14_018, Association of African Young Economists, revised Oct 2014.
  2. Yu Sun, 2011. "Recent Developments in European Bank Competition," IMF Working Papers 11/146, International Monetary Fund.
  3. Chun-Yu Ho, 2007. "Deregulation, Competition and Consumer Welfare in Banking Market: Evidence from Hong Kong," Working Papers 242007, Hong Kong Institute for Monetary Research.
  4. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2011. "Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 856-875, April.
  5. Olivero, María Pía & Li, Yuan & Jeon, Bang Nam, 2011. "Competition in banking and the lending channel: Evidence from bank-level data in Asia and Latin America," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 560-571, March.
  6. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
  7. repec:hhs:bofrdp:2013_007 is not listed on IDEAS
  8. Bana Abuzayed & Nedal Al-Fayoumi & Hisham Gharaibeh, 2012. "Competition in MENA countries banking markets," International Journal of Financial Services Management, Inderscience Enterprises Ltd, vol. 5(3), pages 272-301.
  9. I. Andrievskaya & M. Semenova., 2014. "Does Banking System Transparency Enhance Bank Competition? Cross-Country Evidence," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 9.
  10. Pérez Montes, Carlos, 2014. "The effect on competition of banking sector consolidation following the financial crisis of 2008," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 124-136.
  11. Hasan, Iftekhar & Marinc, Matej, 2013. "Should competition policy in banking be amended during crises? : Lessons from the EU," Research Discussion Papers 7/2013, Bank of Finland.
  12. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2010. "The Global Financial Crisis:How Similar? How Different? How Costly?," Koç University-TUSIAD Economic Research Forum Working Papers 1011, Koc University-TUSIAD Economic Research Forum.
  13. Marta Rocchi & Ignacio Ferrero, 2014. "Systematic Shared Value in Finance: Expanding Porter's Approach," Faculty Working Papers 07/14, School of Economics and Business Administration, University of Navarra.
  14. Bing Xu & Adrian Van Rixtel & Michiel Van Leuvensteijn, 2013. "Measuring bank competition in China: a comparison of new versus conventional approaches applied to loan markets," BIS Working Papers 422, Bank for International Settlements.
  15. Lee, Chien-Chiang & Yang, Shih-Jui & Chang, Chi-Hung, 2014. "Non-interest income, profitability, and risk in banking industry: A cross-country analysis," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 48-67.

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