Should Stability Reign? The Consumer Downside of Foregone Competition in Retail Banking Markets

Abstract

Since the global financial crisis, policymakers and economic researchers internationally have highlighted the need for prudential regulation, simultaneously sidelining the importance of competition. However, competition is essential to consumer welfare, and the proposition that competition prejudices stability in financial services is not supported by cogent evidence. In fact, this article demonstrates that competition supports stability and that a failure to prioritize competition increases the likelihood and systemic importance of large financial firms, heightening systemic risk. Australia did not have a recession as a result of the global financial crisis, consequently the article uses Australia to provide a number of examples of the effects of the two policies. The Australian Government initiated two major reviews in 2014: the Financial System Inquiry and the Competition Policy Review. Both highlighted the policy trade-off between competition and financial stability, and emphasized the importance of competition. This article discusses the way competition needs to be reprioritized to the benefit of the financial system and ultimately consumers.