Balancing prudential regulation and competition considerations in banking

1. Background and analytical foundations

1.1. The objectives of prudential regulation

Banking markets are especially vulnerable to instability, particularly from asset-liability mismatches. A core retail banking function is to collect deposits and extend loans, with deposits complementary to loan provision (Vives, 2016[4]). Banks act as intermediaries between lenders and borrowers, creating liquidity but also exposing themselves to two persistent challenges: (i) co-ordination failures that can trigger liquidity mismatches, as short-term savings are pooled to finance long-term credit and (ii) asymmetric information between banks and borrowers, which makes it difficult to assess the risk and quality of loans, increasing the likelihood or non-performing assets and sudden losses of confidence. These frictions expose banks to solvency pressures, liquidity shortfalls and depositor runs (Carletti and Hartmann, 2002[5]).1

Banks also borrow and lend extensively among themselves to manage liquidity. This interconnectedness means the distress of one bank can transmit shocks across the system, propagating contagion (Carletti and Hartmann, 2002[5]). Risky lending or default by one bank can cascade across counterparties, amplifying systemic effects. When households and firms lose access to deposits or credit, the contraction in spending and investment can rapidly spill over to the wider economy (OECD, 2017[3]). A malfunctioning banking system can generate significant negative externalities for the broader economy, including credit shortages, fire-sale dynamics due to asset-liability mismatches, asset price booms and busts, and feedback loops between banks and sovereign debt markets that can amplify both financial and fiscal fragilities (Stein, 2012[6]; Brunnermeier et al., 2016[7]). Figure 1 below provides a visual representation.

To mitigate these systemic risks, prudential regulation has been adopted across jurisdictions (Vives, 2016[4]; Hohl et al., 2018[8]). Prudential regulation seeks to safeguard the stability and soundness of the financial system. It is designed to make deposit-taking and lending institutions more resilient to shocks, reduce the risk of failure and maintain confidence among depositors, borrowers and counterparties. By doing so, it helps ensure that credit provision and savings intermediation continue even in periods of stress (OECD, 2011[2]). Prudential regulation takes two complementary forms: micro-prudential and macro-prudential rules, which differ in scope and instruments but share the goal of resilience.

• Micro-prudential regulation focuses on the resilience of individual banks. It seeks to prevent failures that could directly endanger depositors and undermine confidence. This is especially important in deposit and lending markets, where the collapse of one provider can disrupt consumer savings and credit supply (Boissay and Cappiello, 2014[9]).2

• Macro-prudential regulation addresses system-wide stability by monitoring and mitigating risks across the banking sector rather than at the level of a single firm.3

Micro-prudential and macro-prudential regulation are complementary and increasingly interconnected tools in preserving stability.4 This note focuses primarily on (i) micro-prudential measures, such as licensing and capital requirements, which have direct influence on market entry, cost structures and the competitive dynamics of deposit and lending markets and (ii) macro-prudential frameworks, such as resolution regimes, implemented through micro-prudential tools, which aim to mitigate systemic risk and contain the broader impact of institutional failure (OECD, 2017[10]; White, 2014[11]; Ahrend, Arnold and Murtin, 2009[1]; González, 2022[12]).

Figure 1. Banking market stability: challenges and vulnerabilities

Source: OECD.

1.2. The relationship between prudential regulation and competition policy

1.2.1. Complementarities between prudential regulation and competition policy

Competition in the banking sector can fuel efficiency, quality and innovation. It determines how widely and affordably households and firms can access deposits and credit: services that underpin investment, consumption and long-term growth for the economy (OECD, 2011[2]; de Serres et al., 2006[13]). Where competition is weak, consumers face higher prices, lower quality and fewer choices (OECD, 2011[2]). Prudential regulation and competition policy can be complementary, but they are not substitutes; each achieves outcomes that the other cannot (Vives, 2025[14]). When pursued together and balanced, they can reinforce productivity and resilience. The following discussion, though not exhaustive, highlights certain complementarities.

First, historically intense competition was perceived as a potential risk factor for stability (Vives, 2016[4]). The concern was that excessive competition could erode margins, reduce franchise value and lead banks to take on excessive risk, undermining depositor trust and sparking runs. It was also thought to worsen co-ordination problems and increase systemic risk (Cœuré, 2025[15]). For decades, these concerns shaped regulatory approaches, leading to exemptions, limited enforcement, or sector-specific regimes that constrained the application of competition law in banking.

However, evidence suggests that competition can support stability when coupled with appropriate prudential safeguards (Vives, 2016[4]). For example, Schaeck et al. (2009[16]) show, using data from forty-five countries, that competition reduces the likelihood of a crisis and that the time between crises is longer in a more competitive environment. Other studies confirm that competition can enhance systemic stability and that a more competitive market can go hand in hand with a lower level of bank risk (Shehzad and de Haan, 2009[17]; Anginer et al., 2019[18]; Kick and Prieto, 2013[19]). Additional studies conclude that competition in the loan market may reduce risks in banks’ portfolios by influencing borrowers’ risk-taking behaviour (OECD, 2017[3]).5 For borrowers, less competition in banking means higher loan rates, lower profits and increased risk-seeking behaviour. Evidence shows that, as a result, increased competition in loan markets can lower the risk of bank failure by reducing borrowers’ default risk. Studies also examine how competition may increase the cost of bankruptcy and thus act as a disincentive to risk-taking (OECD, 2017[3]; Boyd and De Nicolo, 2003[20]). Generally, empirical and policy evidence suggest that competitive banking markets can support efficiency and strengthen financial stability (OECD, 2011[2]; Vives, 2016[4]; BCA, 2023[21]).

Well-calibrated prudential rules can reinforce the benefits of competition by promoting contestability and enabling exit, while preserving resilience in deposit and lending markets. This shift in perception reflects cross-country research and post-crisis reforms showing that competition and stability can be complementary (OECD, 2017[3]; Vives, 2016[4]). It also underscores the recognition that a lack of competition can pose prudential risks, for example, by entrenching institutions whose failure would have severe systemic consequences (Inderst, 2013[22]). Competition enforcement can thus play a crucial role in strengthening prudential objectives by ensuring a level playing field, preventing anticompetitive effects from materialising.

Second, competition can help amplify the effectiveness of prudential regulation and vice versa. Competition can fuel better-quality institutions, improve monitoring and reporting incentives and reduce the scope for excessive risk-taking (OECD, 2017[3]). That is, competition improves the monitoring incentives of better-quality banks (Carletti and Vives, 2008[23]). When banks differ in the underlying riskiness of their operations, stronger competition tends to discourage additional risk-taking by already prudent institutions (Inderst, 2013[22]).6 Prudential rules that enforce sound risk management and reporting obligations enable well-managed banks and reduce information asymmetries for depositors. Well-regulated markets build trust, which in turn enables competition. In this sense, competition provides a strong foundation for successful policy implementation.

Third, effective competition can help reduce the systemic importance of inefficient banks. The benefits of competitive pressure are manifold. Contestability and the threat of entry may not only discipline incumbents to manage risks more effectively but also spur efficiency and innovation. Diversity also reduces the reliance on a few systemically important firms. More contestable and less concentrated markets can ensure that the failure of one institution poses less systemic risk. In turn, large banks may tend to be more interdependent, increasing systemic risk (Laeven, Ratnovski and Tong, 2014[24]). Higher concentration can be associated with greater potential for financial instability due to the cost of credit, diversification and the ease of monitoring (Calice and Leonida, 2018[25]). Where the market is both concentrated and firms are interdependent or interconnected, acting as counterparties to each other, should one such firm fail, the financial viability of all of its counterparties is called into question (OECD, 2011[26]).

Moreover, too-big-to-fail (TBTF) institutions face moral hazard or distorted incentives: they may take excessive risks, expecting bailouts or benefit from implicit guarantees that lower their funding costs. This can undermine both stability and competition. Prudential and competition authorities thus share an interest in addressing moral hazard and limiting TBTF distortions.7 While limiting moral hazard is typically the role of prudential regulators, competition can help limit the emergence of TBTF institutions and, where they exist, subject them to competitive pressure, taming distorted incentives (OECD, 2017[10]).

Fourth, competition can facilitate the exit of inefficient banks. Without it, weak institutions may persist, draining resources and increasing the risk of contagion. In turn, poorly designed prudential policies may inadvertently prop up failing institutions. As addressed in Section ‎3.1.2, post-crisis resolution regimes can be designed to facilitate a “safe” exit while minimising systemic fallout. This represents growing convergence between prudential and competition authorities: both recognise that shielding inefficient institutions may undermine stability and distort competition (Cœuré, 2025[15]).

Fifth, competition and effective prudential oversight can encourage banks to take on more diversified risks, making the banking system less fragile to shocks (Anginer, Demirguc-Kunt and Zhu, 2014[27]). Competition can reduce co-ordination risks that may undermine both market outcomes and prudential objectives. Such risks, like in other sectors, arise when relatively homogeneous products and concentrated market structures enable market participants to anticipate and align their behaviour. In deposit and lending markets, similar pricing frameworks and product designs enable banks to monitor rivals’ actions, even when consumers perceive offers as heterogeneous due to complex terms and conditions. This asymmetry: transparency among banks but opacity for consumers, weakens rivalry, facilitates co-ordination and harms both consumers and financial stability (BCA, 2023[21]). Competitive pressure helps counteract these tendencies by fostering greater strategic differentiation, innovation and diversity of risk exposures.8 In this way, competition can support prudential objectives by reducing the likelihood that parallel decisions or common shocks translate into systemic fragility (Anginer and Demirguc-Kunt, 2014[28]).

Section ‎3.2 highlights certain concrete examples of how competition policy and enforcement may advance stability objectives. For example, competition can help reduce interest rate spreads: the gap between what banks charge on loans and pay on deposits. Protecting rivalry between lenders can lower borrowing costs and help reduce borrower defaults, decreasing systemic risk (OECD, 2017[3]). In sum, competition drives efficient financial intermediation, supporting growth and innovation across the wider economy (Siciliani et al., 2023[29]).

Taken together, these complementarities illustrate that prudential regulation and competition policy, when designed with an awareness of their interaction, can be complementary. However, this alignment is not automatic. Measures that enhance stability may sometimes constrain rivalry and vice versa. The next section examines these areas of possible tension and the trade-offs they present for policymakers.

1.2.2. Tensions between the objectives of prudential regulation and competition

There are inherent tensions between prudential regulation and competition policy’s goals. These tensions and their related trade-offs span multiple dimensions (Vives, 2016[4]). The following discussion is not exhaustive; it highlights certain tensions relevant to deposit and lending markets when balancing policy objectives. Importantly, the distinct mandates, time horizons, and risk tolerances of prudential and competition authorities can shape how each assesses the same market developments. Moreover, these frictions are not static: they may intensify in periods of stress or when reforms shift the boundaries of each policy’s remit. The degree of divergence varies across jurisdictions, depending on market structure, institutional frameworks and the nature of the institution concerned. Box 1 discusses how national financial market structures may shape the interaction between prudential regulation and competition policy.

Box 1. Financial market structures and their implications for competition

The relationship between prudential regulation and competition policy varies across jurisdictions, reflecting differences in financial market structure, institutional design and levels of financial development. For example, in many European economies, financial intermediation remains predominantly bank-based, whereas in the United States (US), capital markets play a larger role in financing firms and households. These structural differences may affect how competition in banking can impact credit availability and risk dispersion. In market-based systems, competition in securities and bond markets may, to some degree, provide alternatives to traditional lending.

Since the Glass-Steagall Act of 1933, the US has historically separated commercial and investment banking to limit the transmission of risk. This boundary blurred under the Gramm-Leach–Bliley Act of 1999, which allowed financial holding companies to engage in both activities under prudential supervision. While the institutional separation has not been reinstated, post-Global Financial Crisis reforms, such as the Volcker Rule, have introduced a form of functional separation by limiting proprietary trading and certain investment activities. In contrast, many European banks operate as universal banks, combining deposit-taking and investment activities under a single balance sheet, creating both potential efficiencies and potential channels for contagion.

In emerging economies with lower banking penetration, non-bank financial institutions (NBFIs), including FinTechs, BigTechs and mobile network operators, often play a key role in expanding access to credit and payments, sometimes leapfrogging the need for traditional banks.

From a competition perspective, these structural distinctions shape both the scope of rivalry and the potential for vertical or conglomerate effects. For instance, between deposit-taking, securities issuance and asset management. Consequently, while general principles of complementarity and trade-offs apply broadly, the balance between prudential and competition objectives will differ across financial systems, including based on the levels of market development.

Source: Langfield, S and Pagano, M (2016), Bank bias in Europe: effects on systemic risk and growth, https://doi.org/10.1093/epolic/eiv019; Neal, L. and White, E (2012), The Glass–Steagall Act in historical perspective, https://doi.org/10.1016/j.qref.2011.12.005; Board of Governors of the Federal Reserve System (2020), Volcker Rule, https://www.federalreserve.gov/supervisionreg/volcker-rule.htm; OECD (2025), Competition in mobile payment services, OECD Roundtables on Competition Policy Papers, No. 324, OECD Publishing, Paris, https://doi.org/10.1787/0ce6b5d3-en.

A first area of tension concerns contestability, which is central to effective competition in deposit and lending markets. The threat of entry (actual or potential) disciplines incumbents to innovate, offer better rates and higher quality. However, opening markets to new entrants can also magnify prudential risks if those entrants are not adequately supervised or capitalised.

This raises an “in-or-out” trade-off: prudential regulation often requires that any firm engaging in banking-like activities be “in” the supervisory perimeter before operating. Licensing requirements, including capital requirements, protect stability but may also raise entry and expansion barriers that may unintentionally dampen competition. Conversely, leaving providers outside the perimeter risks instability, particularly if they become large or interconnected enough to transmit shocks. In short, if firms are in, competition may suffer; if they are out, stability may be at risk (PRA, 2021[30]). This dilemma is especially salient in fast-moving markets shaped by digitisation, where the boundary between “in” and “out” may shift rapidly as business models scale and interconnect, as discussed in Section ‎2. Because perimeter choices have lasting implications for both competition and systemic resilience, Section ‎3.1.1 briefly considers how to seek a potential balance.

Relatedly, the potential for exit can reallocate resources toward more efficient providers. Without it, weak business models may persist through regulatory forbearance or support measures, potentially reducing efficiency and raising risks over time. Yet, in banking, a disorderly exit, such as the abrupt failure of a financial institution without adequate loss-absorption capacity or resolution planning, can trigger depositor runs, contagion and the interruption of critical functions such as lending, with spillover effects that extend across the economy. This creates a unique tension: while competition policy may view exit as a mechanism for efficiency, prudential authorities may see it as a source of instability (Cœuré, 2025[15]). These differing perspectives can lead to divergent recommendations in supervision or enforcement, particularly during crises.

For example, during crises, prudential authorities may support mergers, state support or other interventions to preserve stability, even when these raise competition concerns (OECD, 2011[26]; OECD, 2021[31]). Past responses, including TBTF policies such as bailouts or state aid, often entrenched incumbents and distorted markets. Limiting liability also created moral hazard, encouraging excessive risk-taking under the assumption of a safety net. Such interventions, justified by short-term stability goals, can produce long-term distortions to competition that are costly to unwind. In recent years, however, the design of bank resolution regimes has evolved to reduce these tensions. As discussed in Section ‎3, effective resolution strategies now aim to balance financial stability and competition (Coeuré et al., 2024[32]).

Second, another source of tension concerns financial innovation. While innovation is often associated with competitive benefits, economic evidence suggests an “inverted U” relationship between competition and innovation (Aghion et al., 2005[33]). That is, when the degree of competition is low, greater rivalry tends to spur innovation, whereas beyond a certain point, further increases in competition may reduce incentives to innovate (OECD, 2023[34]). Reviewing the empirical and theoretical literature, Griffith and Van Reenen (2021[35]) conclude that, on average, the relationship between innovation and competition tends to be more positive than negative. From a competition perspective, this implies that in many markets, greater competition is needed to foster more innovation. In financial markets, however, historical experience shows that some forms of financial innovation, such as derivatives, have amplified instability and triggered crises (Aliber and Kindleberger, 2015[36]). This underscores why prudential authorities may take a more cautious view of innovation than competition authorities.

Third, banks and NBFIs must remain profitable to build capital buffers and meet regulatory requirements, aligning prudential and competition goals when profits stem from efficiency. However, tensions may arise when profitability stems from anticompetitive conduct, leading to differing assessments by authorities, particularly when prudential stability considerations prevail in short-term decision-making. Moreover, while certain forms of co-operation, such as interoperable ATM networks, may be justified on prudential grounds and generate efficiency benefits, co-operation amongst rivals also carries the risk of collusion (Vives, 2016[4]). In the past, some banking cartels were condoned by central banks or regulators in the interest of financial stability (OECD, 2008[37]; 2011[38]; Vives, 2016[4]). Today, such practices are typically subject to standard competition enforcement, including leniency programmes and penalties (Vives, 2016[4]). Importantly, the threat of large penalties and the reputational damage that accompany antitrust enforcement are important deterrents to financial market misconduct (Gandhi et al., 2019[39]). Box 2 discusses the resulting distortions in competition and the delay in economic recovery from weakened cartel enforcement generally during past crises.

Box 2. The negative consequences of weakened cartel enforcement

Past experiences across jurisdictions demonstrate that, during times of crisis, generally relaxing competition enforcement against cartels, intended to promote stability, can lead to enduring distortions in competition and delay long-term economic recovery.

The United States

In the US, cartel enforcement weakened during the Great Depression. The National Industrial Recovery Act of 1933 introduced broad antitrust exemptions across industries and provisions aimed at stabilising prices and raising wages. Although the Act was declared unconstitutional in 1935, many of the co‑operative arrangements it enabled continued to influence market behaviour despite subsequent anti-cartel enforcement. Empirical studies have since found that these policies contributed to the persistence and depth of the Great Depression. Research suggests that these measures reduced consumption and investment by roughly 14% relative to competitive levels between 1934 and 1939.

Japan

In Japan, policy measures introduced to counter recessions in the 1950s and 1960s included the establishment of “depression” or “rationalisation” cartels, which allowed firms to co-ordinate production, reduce capacity and, in some cases, align prices. These interventions were later recognised as having adverse medium and long-term effects on competition and were subsequently abolished.

Research suggests that the lax application of competition law prolonged the recession in the US during the 1930s. Similarly, research on Japan's economic downturn indicates that government intervention to restrict competition in structurally depressed industries prolonged the recession in the 1990s.

Source: OECD (2011), Competition Issues in the Financial Sector: Key Findings, OECD Publishing, Paris, https://doi.org/10.1787/37dd5552-en; Harada, K. and Ito, T. (2008), Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks, https://www.nber.org/papers/w14518; Independent Commission on Banking (2011), Final Report Recommendations, https://webarchive.nationalarchives.gov.uk/ukgwa/20120827143059/http://bankingcommission.independent.gov.uk///; Crane, Daniel A. (2008). " Antitrust Enforcement During National Crises: An Unhappy History" Global Competition Policy, December 2008, www.globalcompetitionpolicy.org; Porter, Michael E., Takeuchi Hirotaka and Mariko Sakakibara (2000). Can Japan Compete? Cambridge,

Mass.: Perseus Publishing, London, Macmillan; OECD (2011), “Crisis Cartels : Key findings, summary and notes”, OECD Roundtables on Competition Policy Papers, No. 119, OECD Publishing, Paris, https://doi.org/10.1787/39a0d2e8-en; Cole, H. and Ohanian, L (2004), New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, https://doi.org/10.1086/421169.

Fourth, tensions can also stem from differences in how sectoral and competition authorities intervene in markets (Cœuré, 2025[15]). Competition authorities typically act ex post (except in merger enforcement, which tends to be ex ante), addressing exclusionary anticompetitive conduct through targeted, one-off interventions. By contrast, sector regulators, particularly prudential supervisors, work ex ante and exercise continuous and discretionary oversight to prevent risks and sustain market confidence (Cœuré, 2025[15]). Their forward-looking mandate reflects the high costs of banking instability and the potential need for preventive action. Prudential authorities can influence market structure not only through licensing conditions and merger approvals (which are often also under the purview of competition authorities across jurisdictions), as other sector regulators do, but also through their powers over resolution, recovery planning, and assessment of the ongoing viability of institutions, playing a continuous and systemic market-shaping role. As a result, prudential regulation may be perceived as shaping markets ex ante, whereas competition authorities typically act ex post to repair markets, in accordance with principles of liability (Vives, 2016[4]). This difference may lead to prudential regulation being treated as a substitute rather than a complement to market forces or competition enforcement, highlighting the importance of co-ordination between prudential and competition authorities.

While trade-offs are inherent, prudential regulation and competition policy can be neutral or, at times, reinforce one another when designed in a complementary way. The challenge and opportunity for policymakers is not only to manage tensions but also to actively harness complementarities to ensure that deposit and lending markets remain resilient and dynamic. The remainder of this section outlines the deposit and lending services landscape as background to the discussion that follows.

1.3. Background to deposits and lending services

1.3.1. Structural barriers to entry and expansion

Switching costs and lock-in are persistent barriers to entry and expansion in retail deposit markets. Across jurisdictions, evidence of low consumer mobility in deposits has led to the adage that a consumer is more likely to divorce than to switch bank accounts. Low mobility persists even where there are sizable gaps between the initial offers on deposit interest rates and the rates most customers actually earn (ACCC, 2023[40]; BCA, 2023[21]; ComCom, 2024[41]; FCA, 2023[42]). Switching costs thus act as an important source of market power in retail banking (Carletti, Leonello and Marquez, 2024[43]).

Consumers face persistent challenges in searching for and comparing offers, as well as in executing a switch.

• Information asymmetries fuel consumer lock-in. In deposits, heterogeneous products, bundling of accounts or services, and the divergence between initial or bonus offers and base rates make an apples-to-apples comparison difficult. That is, even seemingly comparable products can differ materially in terms and conditions, which increases confusion and reduces the salience of superior alternatives. This raises search costs and mutes the threat of consumer departure.

• Price design amplifies lock-in. Many banks rely on introductory or bonus rate structures that expire quickly while the base rate remains low. Once balances revert to low base rates as the default, most customers stay put due to inertia. This “reversion pricing,” where a product is offered at an attractive rate initially, and later automatically reverts to a lower rate, takes advantage of limited switching and rewards incumbents (ACCC, 2023[40]).

• The process of switching can be time-consuming and cumbersome. Porting direct debits and recurring payments, redirecting incoming credits and closing legacy accounts are all common pain points. These frictions weaken demand elasticity, as consumers struggle to respond to better offers, thereby reducing the competitive pressure on incumbents. As a result, incumbents can maintain lower rates on legacy accounts while competing only at the margin for new customers. In practice, this dynamic leaves many depositors locked into lower rates, even when higher introductory or bonus offers are available. Thus, new entrants offering better rates to consumers than incumbents may struggle to secure a toehold in the market (ACCC, 2023[40]).

For these reasons, policymakers and regulators have considered or pursued several strategies to address these barriers and increase contestability in deposit and lending markets (OECD, 2011[2]).9 Moreover, the more products a consumer holds with one provider, the greater the customer inertia, reinforcing lock-in.10 For example, banks that offer a variety of retail products commonly link or bundle perks across products. Deposit accounts are often just one part of the bundle that consumers receive from banks. These accounts may be tied to preferential pricing on savings or loans. These bundles can deter single-product switching, may raise entry and expansion costs for challengers and limit the viability of single-product entrants (Anginer et al., 2019[18]; BCA, 2023[21]). The opacity of these arrangements further reduces mobility and blunts competitive pressure. Importantly, additional obstacles may also arise and further impede the switching process. For example, overdrafts on accounts can also lock consumers in, since outstanding unsecured debt or a lower credit score may complicate moving to an alternate provider (ComCom, 2024[41]).

Switching costs and lock-in are also present for borrowers (Agarwal, Rosen and Yao, 2016[44]). In many credit markets, oligopolistic structures and refinancing frictions, such as documentation burdens, collateral re-assessment or timing costs, dampen pricing pressure and slow competitive entry. Beyond transactional frictions, borrowers' lock-in is also heightened by the perceived value of longstanding ties, or relationship capital, with their bank (Vives, 2016[4]). Asymmetric information about borrowers’ creditworthiness may further entrench incumbents, where they hold proprietary data on projects and repayment capacity. This reduces screening costs and supports retention pricing, making it harder for challengers to compete.11

Further, because the provision of deposits and lending is often two-sided, with banks competing both to gather deposits and to extend credit, market dynamics on one side can entrench power on the other (OECD, 2025[45]). Incumbents can fund loan growth at lower marginal cost through deposits, while challengers without deposit-taking authority must rely on costlier wholesale funding, securitisation, or bank partnerships. This can raise challengers’ break-even rates and limit head-to-head rivalry in lending. Incumbents can also spread fixed and sunk costs across various areas, including technology, cybersecurity, data, reporting and marketing, to a wide customer base, thereby lowering their average cost relative to challengers. In turn, the fixed and sunk costs associated with entry and expansion, spanning compliance to marketing, may raise the minimum efficient scale required for challengers to compete.

As a result, to date, in many jurisdictions, the supply of deposits and credit is observed to be highly concentrated, with a small number of large incumbents serving most customers (Beyer, 2024[46]). High concentration may be associated with weaker consumer outcomes, where there is limited choice and weak pricing pressure (Vives, 2016[4]). Recent market studies confirm that concentrated retail banking markets, combined with switching frictions, slow and narrow the pass-through of savings and lending rates (ACCC, 2023[40]; BCA, 2023[21]; ComCom, 2024[41]; FCA, 2023[42]). This limits consumer benefits from competition and weakens the transmission of monetary policy, as rate changes are passed through more slowly and incompletely.

Greater competition enhances the responsiveness of the economy to interest rate changes, supporting macroeconomic management by central banks and improving the transmission of monetary policy (Lagarde, 2024[47]). In competitive markets, firms react more swiftly to changes in financing costs, while higher concentration may blunt these effects, particularly for smaller firms (Ferrando et al., 2023[48]). That is, one of the channels through which monetary policy can affect the real economy is the credit channel, with monetary easing affecting the cost of borrowing from banks (Byrne and Kelly, 2017[49]).

A weakened or asymmetric pass-through can impact prudential objectives in several ways. When reductions in policy rates are not fully passed on to borrowers, lending rates remain high compared to funding costs, increasing repayment burdens and default risk, particularly for more leveraged households and SMEs. Over time, this can weaken banks’ asset quality and amplify credit risk. More competitive lending markets, by facilitating faster and more complete pass-through to borrowers, may help contain such risks and improve loan performance (Byrne and Kelly, 2017[49]; Van Leuvensteijn et al., 2008[50]).

However, stronger competition may also compress bank margins and incentivise greater risk-taking, underscoring the need for appropriate prudential safeguards (Byrne and Kelly, 2017[49]; Van Leuvensteijn et al., 2008[50]). The effects of intensified competition on stability are complex and trade-offs may be present where banks cannot rely on “stable” deposits (Stenbacka and Takalo, 2019[51]). For this reason, prudential regulations may emphasise liquidity or other prudential requirements for banks. As discussed in Section ‎3.2, competition, under appropriate prudential safeguards, can help alleviate weak pass-through and support overall financial stability.

In sum, in deposits and lending alike, these structural barriers to entry and expansion enable incumbents to sustain market power, raising rivals’ costs and limiting entry and expansion. Lowering barriers in retail banking markets and enabling contestability can advance both prudential and competition objectives in complementary ways, provided they are properly balanced and subject to prudential oversight, thereby enhancing diversification, efficiency and quality while promoting consumer welfare.

1.3.2. NBFI entry and opportunities for competition

Deposit and lending services help fuel the economy by channelling savings into productive investment through financial intermediation. However, across many jurisdictions, consolidation has been a persistent feature of these core banking services, coupled with limited new entry and the continued dominance of incumbent banks (Philippon, 2017[52]). Traditionally, these core banking activities have been performed by licensed banks that collect deposits, extend loans and operate under the supervision of prudential authorities. In recent years, however, digitisation and technological innovation have begun to transform the competitive landscape. Digital challenger NBFIs, including neobanks, FinTechs and increasingly, BigTechs, have entered some of these core banking segments, reaching customers at scale through digital interfaces, often leveraging large user bases, data-driven credit scoring and embedded finance models (OECD, 2025[45]).

It is worth noting that while NBFI entry can bring many benefits to competition, as addressed below, their growing role also introduces prudential and competition concerns. These concerns are often amplified by risks associated with digital ecosystem business models. From a competition perspective, these business models and data advantages may enable the leveraging of market power from adjacent digital markets into financial services (Ehrentraud et al., 2024[53]; OECD, 2025[45]).12 From a prudential perspective, while new competitors may improve efficiency in financial intermediation by offering greater product diversity and lower costs, they also pose systemic concerns, as their expansion may erode incumbents’ profitability and increase risk-taking incentives (Carletti et al., 2020[54]). Moreover, the growing reliance of banks and other financial providers on outsourced technology services from a handful of BigTechs raises operational third-party risks. BigTech ecosystems may warrant particular attention because a disruption in one part of the ecosystem can spill over into others, amplifying contagion across financial and non-financial services.13

Many new entrants initially avoid heavily regulated, capital-intensive activities such as deposit-taking. Instead, they focus on payment services first, which often fall outside the prudential perimeter, as they can carry lower risks and thus allow for rapid entry. This sequencing, beginning with payments, then expanding into credit, has become a common pathway to entry for FinTech and BigTech challengers. This new wave of entry has contributed to innovation and efficiency gains, lowered prices and expanded consumer choice, particularly in payments and lending, which can provide a pathway to expansion into broader retail banking markets (OECD, 2025[45]). In this way, NBFI entry has enabled the progressive unbundling of core banking services, making at least some segments, such as lending, more efficient and innovative.

NBFI lending has the potential to circumvent some of the limitations of traditional credit markets, such as high intermediation costs. In this sense, NBFI lending may represent more than just a new delivery channel for credit: it has the potential to reconfigure the financial services value chain more broadly. By unbundling certain lending functions from traditional banks and enabling competition, NBFI lending can reshape market structure, foster dynamic entry and realign incentives toward consumer welfare. As discussed by Ehrentraud, Mure, Noble and Zamil (2024[53]) the presence of these market participants can also enhance resilience by acting as a “spare tyre” for the financial system, mitigating variations in the supply of credit in times of banking sector distress.

The potential for NBFI expansion into deposit markets, or eventual full-fledged expansion across banking services, can similarly challenge traditional intermediation models and reshape market structure. Generally, by separating deposit-taking, payments and liquidity management from the balance sheets of incumbent banks, NBFIs can introduce new forms of competition into services historically characterised by concentration. Such entry and progressive unbundling can spur innovation in savings and credit products, payment functionality, and user experience, thereby expanding consumer choice and potentially promoting more efficient allocation of liquidity within the system.

Yet, despite NBFI entry, many incumbent banks remain entrenched, with innovation often limited or channelled along their preferred paths, constraining the full benefits of competition and deterring the viability of NBFIs as a potential “spare tyre” to the financial system in times of stress (US Treasury, 2022[55]; Bogaard et al., 2024[56]; Ehrentraud, Garcia and Quevedo, 2020[57]; OECD, 2025[45]). Enduring challenges affecting competition in deposits and lending, which mute competitive pressure and enable incumbents to preserve their market power, include persistent structural and regulatory barriers to entry and expansion. Awareness of these persistent barriers may help inform policy design or enforcement responses, particularly as disproportionate or unnecessary prudential requirements may entrench incumbents, limiting or steering innovation that reduces the safeguards provided by the “spare tyre” role of independent NBFIs.

Notes

← 1.  Actions by depositors can also impose co-ordination and asymmetric information externalities on other depositors. For example, if many depositors withdraw their funds simultaneously, this increases the risk that other depositors lose their money (OECD, 2017[3]).

← 2.  Core micro-prudential instruments may include:

• Supervision and risk management standards aim to identify, measure, monitor and control risk exposures. While tools vary across jurisdictions, they strengthen internal processes such as governance, risk management and strategy. Supervision may also impose ongoing disclosure and transparency obligations, enabling stakeholders to assess institutions’ risk profiles. In this way, supervision complements other micro-prudential instruments and helps address co-ordination and information asymmetry problems.

• Capital requirements or buffers endeavour to ensure that sufficient resources are held to absorb losses and protect depositors and the financial system from insolvency. They are generally risk-based, with higher-risk portfolios requiring higher capital levels. In doing so, they also help limit exposure to mismatches between assets and liabilities.

• Leverage ratios aim to limit excessive borrowing relative to capital. For example, loan guarantees create future obligations that are not yet reflected on the balance sheet. In some jurisdictions, minimum capital is determined not only by risk-weighted assets but also by a leverage ratio, which imposes a floor even when portfolios are considered low risk (Ahrend, Arnold and Murtin, 2009[1]).

• Liquidity and diversification requirements strive to ensure firms can meet short-term obligations without the need to resort to fire sales or emergency central bank support. They mandate stable funding sources, liquid assets and exposure limits to single counterparties, reducing contagion risk. Such measures are especially important for deposit-takers; credit-only institutions may face lighter or no equivalent requirements (Restoy, 2024[129]).

• Certification, licensing rules and disclosure requirements aim to ensure new entrants are financially and operationally prepared to conduct business safely. They typically assess capital, business model, governance and risk management. As discussed in Section ‎2, licensing regimes vary widely across jurisdictions and are a key determinant of market entry conditions in deposit and lending markets (Anginer et al., 2019[18]; Ehrentraud et al., 2024[53]). Some jurisdictions permit non-bank financial institutions (NBFIs) to offer limited deposit services, typically excluding demand deposits. Many jurisdictions also permit NBFIs to provide lending services, often under less stringent prudential rules, but with limits to prevent them from holding a significant share of system deposits (BCBS, 2024[87]).

← 3.  Core macro-prudential instruments may include:

• Countercyclical capital buffers require the buildup of capital in booms for release in downturns. They increase system resilience, moderate the financial cycle and mitigate pro-cyclical lending, helping to prevent credit crunches (Coelho and Restoy, 2024[136]).

• Systemic risk buffers require systemically essential or too-big-to-fail (TBTF) institutions to hold additional capital, reducing the risk of systemic disruption (FCA, 2025[127]).

• Limits on excessive lending by setting maximum loan sizes against collateral value or borrower income to reduce over-leveraging (Bank of Spain, 2020[117]).

← 4.  For example, resolution frameworks exhibit this connection. While they are designed to contain the systemic fallout of a failing institution, they rely on micro-prudential tools that operate at the level of individual institutions, such as imposing loss absorption or recapitalisation requirements.

← 5.  Competition had long been thought to reduce stability by exacerbating risk and reducing banks’ incentives to behave prudently. This negative belief has been countered by the argument that competition in the loan market may reduce the risk of banks’ portfolios; in addition, the predictions of negative effects of competition on systemic risk have also been challenged (OECD, 2017[3]).

← 6.  However, competition may prompt already risky banks to take on even greater risk (Inderst, 2013[22]). This is why prudential safeguards, as a complement to competition, help safeguard these markets.

← 7.  Moral hazard refers to the risk that financial institutions are incentivised to engage in risky behaviour because they do not bear the full consequences of their actions. This is often due to government backing, bailout, or insurance.

← 8.  For example, the Belgian Competition Authority, in its market study, observed that the four largest banks tend to “ride in peloton,” offering comparable savings products on broadly similar terms, with little variation in interest rates relative to smaller or niche banks (BCA, 2023[21]).

← 9.  As highlighted in this Section, switching costs, data asymmetries and consumer inertia are among the most significant structural barriers to entry in retail banking. Together, these frictions weaken consumer mobility, mute price sensitivity and reduce the diversity of providers and competitive pressure. The result is well-documented across jurisdictions: despite wide gaps between introductory and ongoing deposit rates, few consumers switch providers. As a consequence, incumbents face little pressure to raise interest rates for deposits or lower interest rates for loans, while challengers may struggle to attract sufficient customers to compete at scale (ACCC, 2023[40]; BCA, 2023[21]; ComCom, 2024[41]; FCA, 2023[42]).

The G20/OECD High-Level Principles on Financial and Consumer Protection (2022[138]) emphasise that consumers should be able to “search, compare, share data and, where appropriate, switch between products and providers easily and at reasonable and disclosed costs, for instance by leveraging interoperable systems.” Across jurisdictions, a range of policy approaches has been used to tackle these barriers and strengthen contestability in deposit and lending markets. They include:

• Consumer education and transparency. Enhanced disclosure of effective interest rates, expiry of bonus rates and fee structures in standardised and easy-to-understand formats can reduce information asymmetries and enable “apples-to-apples” comparisons. Regulatory-led comparison tools can further increase transparency. The UK’s Financial Conduct Authority (FCA) requires clearer savings rate disclosure and publishing of “sunset clauses” on bonus offers, aiming to reduce consumer inertia (FCA, 2023[42]; 2024[134]). Similarly, the Belgian Competition Authority recommended reforms to improve comparability and transparency in savings products (BCA, 2023[21]).

• Simplified switching processes. Switching packs can reduce administrative burdens. These arrangements, often developed through industry self-regulation or competition authority intervention, require banks to handle much of the paperwork to redirect payments and transfer balances (CMA, 2014[112]). The UK’s Current Account Switch Service (CASS) guarantees account switches within seven working days and redirects payments automatically (FCA, 2015[124]). While it has reduced technical barriers, behavioural inertia persists, suggesting that switching tools require pairing with transparency and active consumer engagement. Importantly, accounting for behavioural economics insights is also key to tailoring initiatives toward what consumers actually want (FCA, 2013[143]).

• Data and information portability. Access to consumer financial data can reduce informational switching costs. These can include multiple mechanisms, such as credit information sharing and open banking.

Credit information sharing through public registries or private bureaus is a proven tool for reducing asymmetries and disciplining borrower behaviour (OECD, 2011[2]). For example, in its Competition Market Study of Tunisia’s Retail Banking Sector, the OECD identified the introduction of market infrastructure, such as credit information bureaus, as potentially important to reducing lending risk by shrinking information asymmetries and reducing the competitive advantages enjoyed by larger banks with larger customer bases (OECD, 2023[58]). However, while many jurisdictions have national credit information sharing in place, work remains to be done to improve access to credit information across borders (World Bank, 2021[128]).

Cross-border credit information is becoming increasingly important for competition in deposit and lending markets. As services are provided across borders, national reporting systems may no longer suffice. Without cross-border data sharing, borrowers may face higher costs or exclusion due to the fragmentation of credit information. Conversely, effective cross-border reporting initiatives, such as the European Central Bank’s AnaCredit framework and regional projects in West Africa, demonstrate that greater data availability can reduce information asymmetries and foster competition by enabling new entrants to lend on a sounder basis (World Bank, 2021[128]). However, divergent privacy and bank secrecy laws, as well as localisation requirements, are a barrier to cross-border credit information sharing.

Open banking has been adopted in a number of jurisdictions as a pro-competitive regulatory intervention, often spurred by competition authority findings of weak customer mobility in deposit markets and limited contestability in lending. Open banking extends the use of consumer financial data beyond the confines of traditional banks, which historically maintained such information within closed “walled gardens” (OECD, 2025[45]). By enabling consumers to share their account and transaction data with accredited third parties through secure interfaces, such as APIs, open banking helps reduce information asymmetries that otherwise hinder switching in deposit and lending markets. In doing so, it allows challengers to design competing deposit products or offer credit based on richer, more accurate assessments of borrower profiles.

By broadening data access, such regimes aim to lower barriers to entry, facilitate switching and increase competitive pressure on incumbents to offer better rates and terms, while simultaneously improving prudential outcomes through enhanced transparency. The design of open banking regimes and the accompanying technical standards, differs significantly across jurisdictions. When deciding whether to introduce or refine open banking and related data portability and interoperability frameworks, policymakers benefit from grounding their choices in an assessment of market dynamics, including the degree of competition (OECD, 2025[45]).

A further barrier identified in many jurisdictions is the bundling of products across banking services, including deposits and lending (BCA, 2023[21]; ComCom, 2024[41]). Tying or bundling preferential loan terms to transaction accounts or savings products can increase customer inertia and foreclose single-product entrants. Pro-competitive remedies may include requiring the unbundling of certain products, ensuring transparency around conditional discounts and ensuring the portability of adjacent services when consumers switch accounts. Similarly, measures that promote interoperability across ecosystems, such as enabling portability and interoperability can limit lock-in and support contestability.

Taken together, these barriers, including bundling, switching costs and data asymmetries, limit consumer mobility and blunt competitive pressure. Recent market studies show that addressing these frictions can yield measurable benefits (ACCC, 2023[40]; BCA, 2023[21]; ComCom, 2024[41]; FCA, 2023[42]). Lower frictions increase demand elasticity, forcing incumbents to raise rates on legacy balances, reduce reliance on reversion pricing and improve service quality. For example, in New Zealand, the Commerce Commission found that lowering barriers to entry and facilitating switching would intensify pressure on incumbents to compete more vigorously, particularly in savings accounts (ComCom, 2024[41]).

Competition can also enhance prudential regulation’s objectives, for example, ensuring that consumers can reallocate deposits away from riskier banks. In markets where switching is a threat, competitive pressures may incentivise better compliance with prudential rules. For example, banks that take excessive risks may be more likely to lose funding and business to safer rivals. Thus, transparency, combined with switching tools, can reduce incentives for banks to take excessive risk.

← 10.  Conglomerate and ecosystem effects also raise multi-product switching costs. For example, payments provided through digital ecosystems can steer default deposit choices (OECD, 2025[45]).

← 11.  The entry of BigTechs brings an entirely different scale and scope to data collection, integrating behavioural, social and transactional data drawn from across their digital ecosystems. Indeed, in some jurisdictions and as markets evolve, banks have sought to match social networking data, including through partnerships with Big Tech companies, with banking data to better understand their clients. This underscores the unparalleled competitive advantage BigTechs may have through their collection and use of data (OECD, 2025[45]).

← 12.  BigTech providers particularly count on a significant volume of user adoption as part of their ecosystem offerings. Multiproduct ecosystems refer to groups of complementary or interrelated products and services that form a bundle for final consumers to use. Engagement across services in an ecosystem may lead to increased switching costs, generating lock-in for customers. BigTech providers’ access to user data through their core businesses and related offerings enables the deduction of user behaviour and facilitates the provision of financial services, such as lending. As a result, BigTech providers possess a unique competitive advantage due to their access to user data collected through non-financial activities in their ecosystem. In turn, payments and lending generate more data, thus adding to a platform’s value and growth. By integrating mobile payment solutions and lending into their platform ecosystems, BigTech providers can create a lending service that is hard for their potential competitors to replicate. BigTech providers also have unique incentives to provide financial services and, particularly, payment and lending services, as many activities within their ecosystems (e.g., e-commerce) benefit from the ability to realise payments, including those enabled by loans. For example, the growing involvement of BigTech platforms, often through e-commerce or mobile wallets, has shifted lending models toward ecosystem-based provision.

← 13.  Digitisation has also reconfigured the banks’ internal operations and the wider financial services value chain, with growing reliance on outsourced technology services such as cloud computing, cybersecurity and data analytics. This reliance on certain concentrated technology layers can create new forms of operational third-party risk (Restoy, 2023[107]). For example, a majority of financial institutions rely on a handful of global cloud service providers for critical functions and this dependence is deepening (CSA, 2023[119]; US Treasury, 2023[144]; LSEG, 2025[121]). Given the high concentration in the cloud market, even a single outage could generate systemic effects across the financial sector (ESMA, 2021[120]; OECD, 2025[139]). Prudential authorities are increasingly alert to these vulnerabilities (EBA, 2025[122]). BigTech ecosystems are a particular concern, as disruption in one part of the ecosystem can spill over into others, amplifying contagion across financial and non-financial services. This has raised questions concerning whether traditional prudential tools are sufficient to address concentration and systemic risks when they originate outside the regulatory perimeter (Feyen et al., 2021[84]; OECD, 2020[140]).

Policymakers are responding. At the international level, supervisory frameworks are being strengthened, while regional and national initiatives are proliferating. For example, the Basel Committee on Banking Supervision (BCBS) revised its Principles for Sound Management of Operational Risk and Principles for Operational Resilience in 2021 and, in April 2024, added a new Core Principle on operational risk and resilience. In July 2024, the BCBS also launched a consultation on new principles for sound third-party risk management to reinforce banks’ operational resilience (Barakova, Ehrentraud and Leposke, 2024[63]; BCBS, 2024[118]). In 2023, the Financial Stability Board issued a toolkit to strengthen third-party risk management, while the International Organisation of Securities Commissions and the International Association of Insurance Supervisors developed sector-specific standards (Barakova, Ehrentraud and Leposke, 2024[63]).

In turn, competition authorities are monitoring how the provision of these technology services may reinforce incumbency across ecosystems or enable exclusionary conduct, including where critical technology providers also compete in payments, lending, or deposits (OECD, 2025[45]). The OECD’s recent work on cloud computing highlights concerns about high egress fees, restrictive discount and credit schemes and interoperability limitations (OECD, 2025[139]). Such practices can both foreclose entry and expansion by smaller providers and exacerbate operational risks for banks by deepening reliance on a small set of dominant suppliers. Addressing these practices through competition enforcement, therefore, can deliver joint competition and prudential benefits.

In addition to enforcement, pro-competitive regulatory tools can complement prudential objectives. The EU’s experience with the Digital Operational Resilience Act (DORA) and the Digital Markets Act (DMA) illustrates how prudential and competition policies can address different facets of technology reliance and intermediation in complementary ways. DORA addresses the prudential risks of systemic dependence on a few technology providers by creating a prudential oversight regime for these third-party providers. DORA effective from 2025, establishes a harmonised framework for managing information and communication technology (ICT) risk. DORA explicitly extends oversight to critical third-party providers, including cloud operators, giving European Supervisory Authorities direct supervisory powers to address systemic dependencies (EBA, 2023[123]). In turn, the DMA targets some of the same firms, designated as digital gatekeepers, with the aim of making markets contestable. In sum, the benefits of close co-operation between prudential and competition authorities may be heightened by digitisation and rising areas of joint concern and they can benefit from futureproofing for risks, as discussed in Section ‎3.3.