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The Role of the State in Promoting Bank Competition

GFDR 2013 Report

Chapter 3. The Role of the State in Promoting Bank Competition

Chapter Highlights

  • Competition in the banking sector promotes efficiency and financial inclusion, without necessarily undermining financial stability.
  • Even if the recent crisis is perceived as an episode where competition exacerbated private risk taking and helped destabilize the system, the correct public policy is not to restrict competition. What is needed is a regulatory framework that ensures that private incentives are aligned with public interest.
  • The state can play a role in enhancing banking competition by designing policies that guarantee market contestability through healthy entry of well-capitalized institutions and timely exit of insolvent ones and by creating a market-friendly informational and institutional framework.
  • Governments should be mindful of the consequences of their intervention during crises and limit negative consequences on bank competition and risk taking.

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