The financial regulator itself can create barriers to competition, mostly because financial stability is historically prioritized over other policy goals. Some examples are excessive compliance costs, licensing requirements that are outdated or arcane and overburdening capital requirements. There’s a tenuous line separating innovation-stifling to innovation-stimulating regulation. Additionally, authorities have to decide between a straightforward equanimous playing field (“blind-to-size”), which levels incumbents but may toughen access to entrants, and an asymmetric regulation, which favors Fintechs and other entrants over banks, thus lowering switching costs and increasing contestability1.
1. OECD (2020), “Digital Disruption in Banking and its Impact on Competition”, OECD Roundtables on Competition Policy Papers, No. 243, OECD Publishing, Paris, https://doi.org/10.1787/b8d8fcb1-en.
