Monopolistic Behaviour of Banks Essay

1392 Words 6 Pages
Introduction
The banking and financial sector and the need for regulation have attracted attention and concentration both in academic and policy discussions. The question of how competition affects system’s stability and regulation effectiveness is not well stated yet. The appeal of competition in the banking sector has been a matter for discussions for a long time. After the crises of the 1930s, antagonism was kept in low levels in order to protect system’s stability. There was a wave of deregulation in last decades which raised many restrictions on competition, and as a result banks were able to extend their investments in riskier actions and new locations. Afterwards there was observed a new wave of breakdowns and failures in the
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Banks behave as intermediators between depositors and borrowers. Thus, providing insurance to depositor and screening investment plans are banks’ two main roles. The former creates instability risk and the latter creates significant informational asymmetries between banks and borrowers and between banks themselves, which can distort remarkably banks’ competition.
Economic and financial theory gives conflicting sights on the need for and the results of regulations and supervision on bank entry. Some people argue that effective controlling of bank entry can support stability. Others argue that banks with monopolistic power have larger privilege, which promotes more careful risk-taking behaviour (Keeley, 1990). Others disagree, and support the beneficial effects of competition and the harmful results of regulated banks’ entry (Shleifer and Vishny, 1998).
Definitions
Regulation relates to placing specific policies and rules of behaviour and performance that firms (banks) have to observe. These can be set via legislation (law) or be fixed by the relevant regulatory authority such as FSA in U.K. and FED in U.S.A.
Monitoring of these regulations relates to the method by which the relevant authority evaluates whether these rules are being obeyed by financial institutions (banks).
Supervision refers to

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