1. Introduction The banking sector, and the whole financial sector more generally, is one of the most regulated sectors of the economy because of reasons linked to systemic risk and consumer protection. In most countries its regulation dates back to well before the introduction of competition policy. Given this peculiarity and the idea that competition is detrimental to stability, competition in the banking sector was basically suppressed until financial market liberalization started in the US in the 1970s and continued later on in Europe. Since the beginning of the liberalization process, several important banking crises have occurred (in diverse places like the US (S&Ls), Scandinavia, Spain, and the recent one derived from the subprime crisis).
Special provisions in the application of competition policy to the banking sector remained also long after the start of the liberalization process. For example, until December 2005 competition policy was applied in Italy by the central bank rather than by the competition authority. Similarly, in the Netherlands the banking sector was exempted by competition policy until 2000, two years later than the other sectors. In contrast, neither the European Treaty nor the merger regulation include special provisions for banking, with the only exception of the provision of art. 21 of the merger regulation that leaves Member States the possibility to protect legitimate interests such as prudential control. The important question –which we address in this paper– is to which extent competition policy has been applied in practice, and how competition policy has affected the development of regulation and the stability of the sector.
Several aspects can make competition policy prominent in banking. Indeed, the banking sector is important because of its weight in the economy and because it is crucial to provide finance to firms. Financial firms often need to collaborate (e.g. in payment systems) and this may raise competition issues. Finally, there are concerns that the