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Competition Policy for Modern Banks

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  • 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

  • Lev Ratnovski, 2013. "Competition Policy for Modern Banks," IMF Working Papers 13/126, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/126
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Balázs Égert & Antoine Goujard, 2014. "Strengthening Competition in Poland," OECD Economics Department Working Papers 1125, OECD Publishing.
    4. Mullineux, Andy, 2014. "Banking for the public good," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 87-94.

    More about this item

    Keywords

    Banks; Banking; Competition; Risk management; Macroprudential Policy; Systemic risk; Competition Policy; bank competition; mergers; General; Government Policy and Regulation;

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