Competition just as important as prudential regulation in banking

by Julia Corderoy08 Apr 2016
Competition, not prudential regulation, is what builds resilience and drives growth, the chair of the competition policy review panel has said.

Speaking at the Australian Financial Review (AFR) Banking and Wealth Summit in Sydney this week, Professor Ian Harper said the importance of fostering competition in financial services is the most important recommendation to come out of the Murray Financial System Inquiry (FSI). 

“Not because it stands over against systemic stability but because competition itself builds resilience by building choice, by building the capacity for a new entity, variety and robustness,” he said.

“That is as important in a financial system as it is anywhere else in the economy. Competition drives innovation which drives productivity and growth.”

By limiting the system’s reliance on prudential intervention, Harper said the balance between competition and stability can be more accurate. 

“Deliberate intervention, which runs against the principles of competition, is a limiter to innovation and hence productivity,” he said.

“I want to wave a flag for competition policy. I want to say that the financial services sector is not exempt from the dictates of competition policy. I want to say that prudential regulation has a very important role to play, but it is over against the need for competition – for entry, for innovation, and ultimately for the system to serve the needs of consumers.”