Competition and Regulation in Retail Banking

Competition can improve the functioning of the retail banking sector without harming prudential regulation. The efficient functioning of the sector is important for economic performance. The efficient functioning of the retail banking sector in all OECD countries is important to promote the economic potential of these countries’ economies. Retail banking is delineated as banking services for consumers and for small and medium sized enterprises (SMEs) having a turnover of less than 10 million Euros. Consumers as well as SMEs rely heavily on the banking sector for their financial services and external finance. The access of retail customers and SMEs to finance is particularly crucial for economic growth, given that much growth in employment and GDP comes from the development of SMEs. Banking competition can play a role in improving the conditions for access to finance, such as lower interest rates for loans, or a lower degree of collateralisation. However, competition does not always seem to work properly in the retail-banking sector. Several broad results emerged on how to improve the competitive environment of retail banking without harming prudential regulation.