21 Dec 2009

Prudential regulation and competition in financial markets: Latest from OECD

In a recent paper, titled "Prudential Regulation and Competition in Financial Markets" the Organisation for Economic Cooperation and Development (OECD) has written extensively on the aspect of Prudential regulation and competition in financial markets. The abstract of the paper states as under;

This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information on financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed, in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond. Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance. Only few trade-offs are identified, with some areas of prudential regulation – most notably the strength of the banking supervisor – even associated with greater competition in banking. Overall, the results suggest that stability-enhancing regulatory reform does not necessarily come at the expense of competition. Although much of the analysis is based on pre-crisis regulatory settings which have been undergoing substantial change, the empirical evidence in this paper can provide useful insights in the context of ongoing financial regulatory reform.

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