The Organisation for Economic Co-operation and Development (OECD) has published a paper outlining its findings following a round-table discussion involving delegates from global competition authorities, held this month in relation to competition, concentration and stability in the banking sector.
The delegates discussed measuring competition in financial markets and the complex nature of this assessment due to peculiar features of financial markets. In this context, market concentration is only a first step in the analysis and other important considerations include market contestability, the existence of entry barriers, competition from non-financial firms, and the size of competitors and customers.
As to whether market concentration (or "excessive competition") may have contributed to the financial crisis, the delegates suggested that there were ambiguous effects across their respective different jurisdictions. It was suggested that regulatory failures rather than excessive competition led to the recent financial crisis; better prudential regulation and supervision will therefore improve stability and can make banks less inclined to take on excessive risk. Regulatory effectiveness decreased dramatically because regulators were unable to respond to financial innovation, whereas banks were able to use derivatives to get around regulatory requirements such as capital rules and ratings. Furthermore the emergency measures adopted to remedy the crisis have the potential to harm competition in the financial sector and it is now important to fix the potential negative competitive effects of interventions such as state aid, acquisitions, capital injections and bailouts in this sector.