Competition Policy in Banking and Financial Services Kevin Davis Commonwealth Bank Chair of Finance, University of Melbourne Director, Melbourne Centre for Financial Services

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 Who’s involved in competition policy? What types of policies are in place?

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

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

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

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……

Evidence on market concentration trends Australia Internationally Increased role of multinational banks Vertical integration in the financial services supply chain

Multinational Bank Growth Substantial Merger Activity Ongoing Cross border In recent years, fewer number, but larger value International Expansion numbers Acquisitions > new branches > new subsidiaries

Consolidation v Concentration No general sign of increased concentration Also, no apparent relationship between foreign bank share and concentration

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)

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

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

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

What types of policies are in place? Minimum entry requirements (capital, governance etc) Restrictions on international entry Merger restrictions Shareholdings restrictions