Competition Policy for Modern Banks
IMF Working Papers, May 23, 2013
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- Competition Policy for Modern Banks
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Bibliographic details
- Authors: Lev Ratnovski
- Published: May 23, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484354728.001
Summary
- 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.
- Modern banking is largely market-based and contestable, leading to structurally low charter values for banks in advanced economies and high incentives to take risk.
- Traditional policies that seek to affect the degree of competition by focusing on market structure (i.e. concentration) may have limited effect in this environment.
- The paper argues competition policy should be reoriented to address the too-big-to-fail (TBTF) problem, focus on the permissible scope of activities rather than on market structure, and, following a crisis, facilitate resolution by temporarily allowing higher concentration and government control of banks.
Key findings and analysis
- Modern banking’s market-based and contestable nature implies structurally low charter values for banks in advanced economies.
- Low charter values generate high incentives for banks to take risk, weakening the effectiveness of traditional competition-policy tools based on market structure.
- Emphasizing market structure (for example, concentration metrics) as the primary lever for competition policy may have limited practical effect given structural changes in financial services provision.
- Competition policy should be reframed to directly address systemic issues associated with TBTF banks and to limit the scope of permissible bank activities.
Policy recommendations
- Reorient competition policy to focus on the too-big-to-fail (TBTF) problem rather than primarily on market structure.
- Regulate the permissible scope of banking activities as a central element of competition policy.
- After a financial crisis, temporarily allow higher concentration and government control of banks to facilitate resolution.
Subject areas and keywords
- Subjects: Bank soundness, Banking, Commercial banks, Competition, Crisis management, Financial crises, Financial institutions, Financial markets, Financial sector policy and analysis, Tax incentives
- Keywords: bank, bank competition policy, bank lending, bank merger, Bank soundness, Banks, Commercial banks, Competition, Competition Policy, core bank activity, Crisis management, Europe, lending, Macroprudential Policy, market structure, Systemic Risk, TBTF, TBTF bank, value, WP
Source: Competition Policy for Modern Banks, Lev Ratnovski, May 23, 2013 — https://www.imf.org/en/publications/wp/issues/2016/12/31/competition-policy-for-modern-banks-40568
Content in this bundle
- Competition Policy for Modern Banks; by Lev Ratnovski; IMF Working Paper 13/126; May 1, 2013