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REGULATION AND COMPETITION POLICY - page 6 / 37

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and describe the main results of the enquiries that the Commission conducted in the financial sector.

Several messages are derived in Section 8. In line with the developments in the academic literature, it emerges that competition policy is now taken seriously in the financial sector. The European Commission has by now examined cases in all areas of antitrust and has adopted important, landmark decisions. It has opposed anticompetitive mergers and has contrasted the attempt to pursue national protectionism by certain Member States as well as forms of cooperation in pricing schemes and in credit card systems. Also, the Commission has underlined how regulatory measures imposing for example minimum capital requirements cannot justify the granting of state aid to financial institutions if they entail distortions of competition. In this sense, the Commission has opposed both anticompetitive behavior and protectionism that in many cases is encouraged directly by national regulators or governmental authorities.

Still much remains to be understood in terms of the relation and balance between competition and stability. The concern that regulation can act as a barrier to competition and the difficulty of understanding the working of competition in a highly regulated environment where economic aspects like asymmetric information, switching costs and network externalities are present needs both further research and special attention in the application of competition policy.

2. Regulation in the banking sector: Rationale and instruments It is well known that banks are special because they are more vulnerable to instability than firms in other sectors, and because people hold a non-negligible share of their wealth in bank deposits.2 Instability can originate from the liability side or the asset side of banks. The former is related to runs and systemic crises; the latter to the excessive risk that banks can take in their investment decisions because of the high leverage and opaque

2

See Carletti (2008) and Carletti and Hartmann (2002) for a review of the issues discussed in Sections 2-4.

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