TABLE OF CONTENTS Overview by Xavier Vives
IESE Business School
This overview draws from my joint work with Douglas Gale, Carmen Matutes, and Jean-Charles Rochet and from the overviews in Vives (2001, 2006). Financial support from the Spanish Ministry of Education and Science (project SEJ2005-08263) and from the Abertis Chair on Regulation, Competition, and Public Policy is gratefully acknowledged.
Banking has evolved from a tightly regulated to a mostly liberalized industry subject to competition. The move has been contentious, since it has been claimed that stability has suffered. This section takes stock of what we know about the relationship of competition, regulation, and stability in banking from the perspective of theory, in Chapter 14, by Elena Carletti, and empirics, in Chapter 15, by Hans Degryse and Steven Ongena. The picture that arises is somewhat complex but illuminating.
The relations between competition, regulation, and stability in banking have been subject to intense debate. A somewhat simplistic idea has been that banking is fragile, competition exacerbates this fragility, and regulation has to come to the rescue. In fact, the banking sector was tightly regulated until the liberalization process started in the 1970s. The general benefits of competition impinged on the liberalization of the industry, and a question now is whether the pendulum has not swung too far with too much competitive intensity.
