Competition Policy in Banking and Financial Services

1
Competition Policy in Banking and Financial
Services

• Kevin Davis
• Commonwealth Bank Chair of Finance, University of
  Melbourne
• Director, Melbourne Centre for Financial Services

2
The Issues

• Are there special features of the finance sector
  important for competition policy?
• How have attitudes to entry changed over time?
• How is the market defined?
• What is evidence on market concentration trends?
• How do we assess the extent and effects of
  competition
• Whos involved in competition policy?
• What types of policies are in place?

3
Special features of the finance sector

• Strategic role in economy
• Managing orderly exit of failures and prudential
  regulation
• Financial stability
• Economies of scale and scope
• International trade in financial services
• Consumer information and switching costs
• Networks and information sharing

4
Finance, Growth and Policy

• Substantial evidence supporting hypothesis that
  financial development is a causal factor in
  economic growth
• Little evidence on mechanisms
• And thus limited policy guidance
• Pre-Asian crisis reform involved reduction of
  economic regulation
• Inadequate attention paid to Health, Safety,
  Environment and Information Regulation

5
Changing Focus

• Increasing focus on HSE and Information
  regulation
• Less emphasis on economic regulation
• General acceptance of view that improvement of
  core financial infrastructure is needed for
  success

6
How is the market defined?

• In principle, need to focus on performance of
  economic functions
• Done in different ways through different
  services/products provided by range of different
  types of institutions
• In practice
• Geography v product v customer type
• Banking v Funds Management v Superannuation v
  Insurance v

7
Evidence on market concentration trends

• Australia
• Internationally
• Increased role of multinational banks
• Vertical integration in the financial services
  supply chain

8
Multinational Bank Growth

• Substantial Merger Activity Ongoing
• Cross border
• In recent years, fewer number, but larger value
• International Expansion numbers
• Acquisitions gt new branches gt new subsidiaries

9
Consolidation v Concentration
No general sign of increased concentration Also,
no apparent relationship between foreign bank
share and concentration
10
Increasing Role of Foreign Banks

• Central/Eastern Europe
• Minimal in 1990, 80 of bank assets in 2004
• Asia (excluding Singapore/ Hong Kong)
• Minimal in 1990, most increase (to 20 of bank
  assets in Malaysia and Thailand
• Singapore / HK substantial, but has declined
• Latin America
• Minimal in 1990, increased to around 40
• Source Domanski (BIS Quarterly Review (Dec 2005)

11
Foreign Bank Entry Benefits / Costs

• Higher international diversification lower risk
• But complications for prudential regulation
• Export of skills to exploit competitive
  advantages
• But introduces possible issues associated with
  growth/survival of domestically owned
  institutions

12
Assessing competition

• Applicability of concentration measures
• Simple indicators
• Interest rate margins
• profitability
• Technical measures (H-statistic)

13
Competition policy responsibility

• Possible roles for
• Competition authority
• Prudential regulator
• Securities regulator
• Central Bank
• Treasury/Ministry of Finance
• Politicians

14
What types of policies are in place?

• Minimum entry requirements (capital, governance
  etc)
• Restrictions on international entry
• Merger restrictions
• Shareholdings restrictions