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p. 33 of 62 BACK | NEXT Purpose and Structure of the Toolkit Overview of Practices Controlled by Competition Law Countries with Competition Law Systems Benefits of Competition Policy Practices Controlled by Competition Law Key Concepts and Tools Competition, Privatization, and Regulation OECD's Work in Utility Industries Work of the ICN Structural Separation in Regulated Industries Ex Ante Regulation and Competition When Competition Law Replaces Ex Ante Regulation Sector-Specific Regulator or Competition Authority? Essential Facilities Doctrine and Interconnection Problems Non-commercial Service Obligations Banking and Finance Emerging Economies Enforcement Mechanisms ADB Resources and Projects Other Resources Glossary and List of Abbreviations

Competition Law Toolkit : Competition, Privatization, and Regulation

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I. Banking and Finance

An interesting area of debate is the role that competition law and policy should have in the banking and finance sectors. In some countries, there is very little, if any, competition at all: interest rates, fees, commissions, and other matters may be directly determined by the state or state-owned banks. Complex regulatory rules are common, and competition law may not be applicable to the sector at all. However, this is not inevitable, and there is a growing recognition that the benefits that competition can bring (e.g., lower prices, greater efficiency, a better allocation of resources, improved products) can apply to banking and finance just as much as to other sectors.

These matters were explored at an OECD Roundtable in 1998, Enhancing the Role of Competition in the Regulation of Banks [ PDF ]. The executive summary notes that there has been a substantial relaxation in recent decades in the range of regulations in the sector, e.g., the direct control of interest rates, fees and commissions. However, there has been a strengthening of prudential regulation focused on controls on the capital or "own funds" of banks and an expansion of the number and coverage of deposit insurance schemes. The trend towards trade liberalization has led to banking markets becoming increasingly open to foreign firms. It is recognized that, where there are concerns of market failure, regulation may be necessary. For example, rules to prevent banks from taking undue risks may be needed to protect depositors with inadequate knowledge of banks' exposure. However, this does not mean that banks should be shielded from the forces of competition, and policies which prevent failing banks from exiting the market may seriously distort the process of competition (and amount to state aid.) Most countries in the OECD do subject the banking sector to the competition rules which, in some cases, are applied by the general competition authority and in others, by the banking regulator, or by both. Many mergers are taking place in the banking sector, often with a trans-border impact.

The International Competition Network has also taken an interest in this subject. It has an Antitrust Enforcement in Regulated Sectors Working Group which has published the report, An Increasing Role for Competition in the Regulation of Banks [ PDF ]. It notes the need for regulation to deal with certain issues, e.g., the protection of small depositors and the proper regulation of bank settlements. It also notes the existence of switching costs that make it difficult for consumers to change from one bank to another, and the need for market-oriented regulatory solutions to deal with this. The ICN Annual Conference at Bonn recommended a set of best practices [ PDF ] based on this report. The ICN-recommended best practices aimed at achieving a more competitive and more efficient banking industry through more extensive liberalization, appropriately designed regulatory institutions, a rigorous application of competition rules, and advocacy interventions. These best practices include the following:

• Jurisdictions should promote an open, competitive, banking environment without unjustified restrictions on entry, ownership or exit, resulting either from the rules to be applied or from enforcement practices; and ensure that there is a proper separation between the enforcement of prudential regulation and of the general competition rules.
• Agencies should build good working relationships with the regulatory agencies and coordinate their efforts in reviewing particular matters, whatever the institutional setting; and apply in enforcement the usual tools of antitrust analysis, including market definition, market power/dominance, remedies.

The best practices also suggest that competition authorities, in the exercise of their advocacy functions, should advocate for

• the elimination of exclusions from competition law for financial institutions,
• an environment where banks are informed in a timely and complete manner on the debt exposure of potential borrowers,
• a legal environment where the taking possession of collateral is possible without delay,
• a reduction in switching costs by depositors,
• a reduction of transaction costs on cross-border payments in countries with a common currency, and
• the creation of a legal environment where financial institutions can reduce their risk by joint liability lending, especially in developing countries.

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