Competition and stability in banking in the EU

December 2016

CPI Europe Column edited by Anna Tzanaki (Competition Policy International) & Juan Delgado (Global Economics Group) presents:

Competition and Stability in Banking in the EU By Xavier Vives (IESE Business School)*

Competition in banking has been perceived with suspicion, and even suppressed for extended periods. Competition policy in the banking sector has evolved through different phases. After the Great Depression in the 1930s and up to 1970s, when the liberalization process started in the United States, competition was suppressed in banking, and competition policy was not enforced despite the inefficiencies induced by financial repression. In this period, central banks and regulators in a range of countries tolerated collusion agreements among banks and preferred to deal with a concentrated sector characterized by annulled rivalry. This changed when the idea that competition enhances efficiency took hold in the financial sector and liberalization and deregulation ensued.

In the EU, the European Commission (EC) did not apply the two main competition articles of the Rome Treaty (85 and 86) to banking until the early 1980s. There was also a process of removal of banking exceptions to competition policy at the national level in the EU. Up to the 2007–2009 crisis and in advanced economies such as the EU, competition policy in banking was getting closer to being implemented as it would be in any other sector of economic activity, but still with some sp