Balancing competition and stability in Australian retail banking

Abstract

The Australian Government initiated two major reviews in 2014: the Financial System Inquiry and the Competition Policy Review. These have highlighted policy trade-off between competition and financial stability. Since the global financial crisis, policymakers and economic researchers internationally have highlighted the need for prudential regulation while sidelining the importance of competition. The working paper argues that competition is still essential to consumer welfare and that the evidence does not support the position that ‘competition prejudices stability’ in financial services. Instead, there is division in the academic literature and the issues are far more complex than are often assumed. This working paper uses the rich and publicly available research to consider the balance between competition and stability in the Australian context. It concludes that the evidence is that competition supports stability and that a failure to prioritise competition increases the systemic importance of large financial firms