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Achieving Competition in the Financial Sector

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Competition authorities face misplaced beliefs from those concerned with prudential supervision that competition hurts financial stability. While the economic literature is varied in terms of results and perspectives, it does not find support for the argument that high market power and profitability levels deliver higher stability for the financial sector. In fact, several theoretical and empirical studies identify a positive impact of competition on efficiency and stability in the financial sector, particularly when adequate ex-ante regulation is in place. Competition can actually be key in mitigating the too-big-to-fail problem. Moreover, financial instability should not be regarded as a competition-driven problem, but rather one that relates to the adequateness of the regulatory framework when market circumstances are adverse.

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