Balancing Prudential Regulation and Competition Considerations in Banking

Well-functioning banking markets—particularly those involving retail deposits and lending—are crucial to economic resilience, long-term growth and financial stability. Because banks hold a significant share of household wealth and are crucial for financing economic activity, they are subject to prudential regulation that aims to mitigate systemic risk and maintain depositor confidence. At the same time, competition in banking is indispensable: it lowers prices, improves service quality, fosters innovation, and expands access to financial services. The degree of competition in deposits and lending markets directly affects savings outcomes, credit conditions, and overall productivity. However, tensions exist between prudential regulation and competition.

In December 2025, the OECD held a discussion to explore challenges arising from regulation, digital transformation and consolidation trends in the banking sector. The discussion also explored how policy frameworks can be better aligned and designed to reinforce each other.

This page contains all session information and materials.

• Prudential rules are essential to preserve financial stability. At the same time, they shape market structure by influencing entry, exit, and business models. For these reasons, tensions arise between prudential regulation and competition.
• Prudential regulation and competition can be mutually reinforcing when properly calibrated. Strong prudential frameworks build trust and reduce information gaps, enabling competition to deliver better-quality institutions.
• Contestability makes banking markets more resilient. Even the threat of actual or potential entry can pressure incumbents to innovate and improve quality.
• Credible exit mechanisms, including modern resolution tools, prevent weak firms from persisting simply because they are hard to resolve.
• Effective merger control protects competition and helps maintain a diversified, shock-resistant banking sector.
• Dynamic approaches such as scalable licensing, risk-based capital requirements, and periodic regulatory review can better align requirements with risk profiles while preserving competition.
• Systematic competition assessments reduce unintended barriers and ensure regulations align with stability goals.
• Close co-operation between prudential and competition authorities (through data sharing, joint analysis, and horizon scanning, for example) helps manage trade-offs and keep competition integrated as markets evolve.

OECD Background note | Note de référence de l'OCDE