It examines how stability-oriented regulatory policies for banking and insurance are linked to selected stability and competition outcomes. The results show there isn’t a general trade-off between policies and competition in banking and insurance.
This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information relating to financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond.
Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance.
Only few trade-offs are identified, with some areas of prudential regulation – most notably, the strength of the banking supervisor – even associated with greater competition in banking. Overall, the results suggest that stability-enhancing regulatory reform does not necessarily come at the expense of competition. Although much of the analysis is based on pre-crisis regulatory settings which have been undergoing substantial change, the empirical evidence in this paper can provide useful insights in the context of ongoing financial regulatory reform.
When relating the stringency of prudential policies to competition outcomes, the indicators do not point to stronger prudential regulation having adverse effects on the strength of competition in general. In other words, the results do not support the view that there is a general trade off between stability and competition. Some areas of prudential regulation would even appear to be associated with greater competition. Most notable in this regard is the strength of the banking supervisor, which appears to enhance both stability and competition in banking (the latter possibly because strong supervision helps level the playing field across all competitors). In a few specific areas, however, the analysis identifies trade-offs between the strength of prudential regulation and competition. In particular, tighter regulation with respect to entry rules and ownership structures appears to weaken competition in the banking sector.
© OECD
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