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
Who’s 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 > new branches > 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