Banking Sector Competition: A Roadmap for Financial Stability?

Abstract

The article deals with competition in the banking sector shaped by the post-crisis international banking regulation policy, the key objective of which is to ensure financial stability and reduce the risk of future financial crises. Understanding the new phenomena of competition in the international banking area and its relationship with financial stability should help improve banking sector discipline and increase the potential of credit institutions as reliable providers of financial market liquidity. On the other hand, achieving sustainability between banks’ compliance with supervisory requirements and their ability to secure competitive advantages will not only strengthen their stress resilience in a volatile environment, but also become one of the valid approaches to minimization of systemic risks and systemic stress.

Based on the systematization of extant academic literature on interrelationship between banking sector competition and financial stability (Competitive-fragility hypothesis and Competitive-stability hypothesis), we conclude that such interrelationship is quite ambiguous due to a variety of factors underlying competition that prevent an unequivocal assessment of competition in order to more clearly understand the pitfalls to, and feasibility of, stress resilience in the banking sector: a higher level of competition may contribute to reduction of banking sector vulnerability to various types of risks, and vice versa – it may become a source of instability and crises. Guided by the purpose of integrity in the banking sector, we suggest to complement international banking regulation mechanism with a quantitative assessment of competition which could be a risk-based instrument with relation to the Basel III standards and recommendations. We also present proposals for optimization of the banking sector competitiveness amid internationalization of banking regulation and financial globalization.