Competition Aspects

Effective competition can provide the incentives to expand financial services. Both pru­dential and competition policies (including licensing and entry, exit and merger policies, and branching and similar regulations) should facilitate the presence of intermediary owners and management that are independent of government and of the major local, nonfinancial groups. Line of business restrictions should avoid the creation of uncompeti­tive market segments.

The structure of cross-ownership among financial institutions also matters for effec­tive competition. Often seen as complements, banks and markets do compete for finan­cial sector value added. Where banks control the major nonbank financial institutions, competition between the two will tend to be lower, resulting in less variety and higher cost in the provision of financial services. The same may apply to regulation, because a bank-dominated regulator may be slow to sanction desirable institution building on the nonbank side. For example, if the banks own the collective investment institutions, they may discourage measures that tend to open up the development of that sector, to the extent that it would undermine their future profitability. Information on such cross­ownership can be very informative as to the future development prospects of the financial sector as a whole.

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