Balancing prudential regulation and competition considerations in banking

2. Competition challenges in prudential regulation

This Section discusses enduring challenges for competition in deposit and lending services stemming from prudential regulation. It examines aspects of prudential frameworks that may, in some cases, create unintended competition bottlenecks. In practice, any such bottlenecks may call for consideration, particularly in markets where competitive pressures are perceived to be weak. Approaches to balancing these considerations will necessarily vary across jurisdictions, reflecting differences in competitive landscapes, market structures, institutional settings and broader policy priorities. Therefore, the examples discussed illustrate tensions between prudential regulation and competition that policymakers may wish to consider in context. The potential opportunities for reconciling these objectives are addressed in Section ‎3. The Section also considers challenges arising from consolidation trends and concludes with a discussion of emerging issues in an increasingly digital and interconnected environment.

2.1. Regulatory barriers to entry and expansion

2.1.1. Retail deposits: competition considerations for prudential regulation

Retail deposits underpin both household and business wealth and serve as the foundation of the banking system’s money-creation and credit functions. Disruptions to deposit-taking can have economy-wide effects. Managing liquidity risk is therefore central to prudential oversight, and deposit-taking is typically reserved for institutions that are licensed and supervised. Prudential safeguards are essential to maintaining trust and stability in banking. Without them, the system would be vulnerable to runs, contagion and excessive risk-taking (Vives, 2016[4]). At the same time, licensing and related prudential requirements define the conditions of entry and, if not calibrated in a proportionate manner, may unintentionally limit contestability or slow expansion. Considering competition dynamics when designing or refining such frameworks can help ensure that prudential objectives are achieved effectively while avoiding unnecessary constraints on market entry, innovation, market dynamism, or consumer choice.

Licensing typically determines the associated prudential obligations attached to entry, such as (i) capital adequacy requirements, (ii) the scope of permissible activities and (iii) participation in deposit guarantee schemes, along with other associated governance and supervision standards. While this discussion focuses on these selected prudential obligations, it is not exhaustive. Other prudential requirements, such as liquidity ratios, can also influence entry and expansion, while the complexity of prudential frameworks may heighten compliance costs and affect contestability. At the same time, while this Section focuses on the substantive requirements linked to licensing, procedural aspects of the licensing process itself can also create bottlenecks to competition. This may occur where procedures are excessively lengthy, involve ad hoc or discretionary requirements, or lack legal certainty (OECD, 2023[58]). The following examples illustrate potential competition bottlenecks arising from these selected substantive requirements in retail deposits, as well as areas where trade-offs between prudential regulation and competition may emerge, potentially requiring balancing where competition is assessed to be weak.

First, capital requirements are a key pillar of prudential frameworks that shape entry and contestability in deposit markets. They require banks or NBFIs to maintain a minimum level of capital to absorb losses and continue operating during periods of stress. By encouraging institutions to hold adequate buffers, capital requirements help maintain depositor confidence, reduce the likelihood of bank runs and ensure continuity in the provision of credit. They therefore play an important role in promoting financial stability.

At the same time, capital requirements set a critical threshold for market entry. That is, they represent a price tag to entry. If set too high or without regard to differences in risk profile or institutional size, initial requirements can represent disproportionate costs for smaller firms, tilting the playing field toward incumbents.1 This can limit the number of firms that enter, insulating incumbents even when newcomers could offer more competitive rates or innovative products. Capital requirements can also advantage incumbents, where they represent unaffordable or disproportionate operational costs for new and smaller firms that cannot benefit from the same economies of scale (ACCC, 2023[40]). Thus, when capital requirements are not proportionate, they may create undue bottlenecks to entry or expansion, warranting review, especially when competition is observed to be limited.

In most jurisdictions, capital requirements for deposit-taking institutions are based on the Basel Framework, developed by the Basel Committee on Banking Supervision (BCBS), which sets internationally agreed minimum capital standards for internationally active banks. Under this framework, total regulatory capital must equal at least 8% of risk-weighted assets (BCBS, 2025[59]).2 The Basel standards provide a common benchmark for resilience and are a central reference point for prudential policy globally, helping to promote a level playing field in international banking. Jurisdictions, however, may differ in how they implement these standards for smaller or non-internationally active institutions that fall outside the Basel perimeter. Many jurisdictions apply proportionality principles to simplify requirements for such institutions while remaining consistent with Basel’s overarching objectives.

For example, a mix of the following has been observed across jurisdictions: some apply the full Basel regime only to larger or systemically important banks, others exempt smaller institutions from selected provisions, while some adopt simplified or modified ratios across all providers. For example, full Basel standards are generally applied to mid-sized to large non-internationally active institutions with balance sheets of more than EUR 20-30 billion across many jurisdictions. Some countries apply larger thresholds, for example, the US and Brazil, where the full Basel regime is only applied to large or systemically important institutions (Hohl et al., 2018[8]). In the European Union (EU), Switzerland and the US, smaller institutions are exempted from selected provisions and simplified or modified ratios are applied in India and Brazil (Castro Carvalho et al., 2017[60]; BCBS, 2019[61]; World Bank; BCBS, 2021[62]).

These proportionality considerations can materially influence market structure and contestability (Hohl et al., 2018[8]). Proportionate, risk-based capital frameworks, consistent with Basel standards, can help balance prudential and competition objectives. By tailoring requirements to institutional size, complexity and systemic relevance, authorities can reduce unnecessary entry barriers while preserving prudential safeguards. Section ‎3.1 discusses design options for calibrating capital requirements to promote contestability.

Second, in considering the scope of permissible deposit activities, it may be helpful to consider the associated risk profiles of differing products to assess whether prudential requirements may be calibrated to enable entry. Retail deposit products differ in maturity, liquidity and risk profiles from a prudential standpoint, which may justify differentiated licensing and supervisory requirements.3

• Demand deposits, such as transaction or savings accounts, are payable on demand and can be withdrawn at any time, creating greater liquidity risk and exposure to runs.

• Term deposits, by contrast, are contractually locked in for a fixed period, providing a more stable funding base and thus reducing risks of mismatches.

• Interest rate structures associated with these different types of deposits also vary, reflecting their differences. Highly liquid accounts tend to offer negligible or variable returns, while term deposits pay higher fixed rates in exchange for reduced access to funds for a term.

Due to the distinct risk characteristics of deposit products, prudential frameworks may differentiate between types of deposits when considering permissible activities for NBFIs. Across most jurisdictions, monoline (single-activity) licenses are not available for demand deposits, with limited exceptions.4 That is, accepting demand deposits is reserved for entities that hold a full banking license (authorising multiple activities, including deposit-holding and credit-extension). This reflects the heightened liquidity and co-ordination risks associated with demand deposits and their central role in the financial system.5

However, some jurisdictions allow NBFIs to hold certain deposits, typically time deposits, which are perceived as less risky, subject to certain conditions within the prudential perimeter. For example, Germany’s Banking Act allows NBFIs to accept term deposits.6 In Colombia, NBFIs are allowed to issue certificates of deposit, a type of term deposit and in India, monoline licenses are available for term deposits, subject to certain conditions (Barakova, Ehrentraud and Leposke, 2024[63]).7 These regulatory approaches and how they enable competition are discussed further in Section ‎3.1.3. Table 1 summarises examples of jurisdictions with licensing regimes for NBFI deposit-takers.

Table 1. Examples of jurisdictions with licensing regimes for NBFI deposit-takers

Country	Name of license	Demand deposits	Term deposits	Risk-based capital requirements	Deposit guarantee scheme	Supervisory reporting
Argentina	Finance companies	Available	Available	Apply	Apply	Apply
Brazil	Finance companies		Available	Apply	Apply	Apply
Colombia	Financing companies		Available	Apply	Apply	Apply
Hong Kong (China)	Deposit-taking companies		Available	Apply		Apply
India	Non-bank financial companies		Available	Apply		Apply
Mexico	Popular financial Societies	Available	Available	Apply	Apply	Apply
New Zealand	Non-bank deposit takers		Available	Apply	Apply	Apply
Singapore	Finance companies		Available	Apply	Apply	Apply

Source: Adapted from Ehrentraud, J., Mure, S., Noble, E. and Zamil, R. (2024), Safeguarding the financial system’s spare tyre: regulating non-bank retail lenders in the digital era, https://www.bis.org/fsi/publ/insights56.pdf; Mexico Financial License (2025), Mexico Licensing Guide 2025, https://mexicofinanciallicense.com/wp-content/uploads/2025/08/Mexico-Licensing-Guide-2025.pdf; New Zealand Financial Services Providers Register (2025), Applying to be a non-bank deposit taker (NBDT), https://fsp-register.companiesoffice.govt.nz/help-centre/providing-licensed-or-certified-services/applying-to-be-a-non-bank-deposit-taker/.

The rationale for expanding the scope of activities that NBFIs may undertake varies across these jurisdictions. It may reflect specific economic conditions, jurisdictional characteristics, or broader policy objectives, such as enhancing financial inclusion or diversifying market participation. Importantly, in these jurisdictions, where NBFIs are exceptionally authorised to take deposit-taking activities, they enter the prudential perimeter. This entails appropriate oversight and associated prudential obligations to preserve stability, including capital requirements, large exposure limits, creditworthiness assessments, fit-and-proper management assessments and supervisory reporting (Ehrentraud et al., 2024[53]).

Where NBFIs are permitted to take certain types of deposits, jurisdictions may differ in approaches concerning the “in-or-out” choice on whether to extend deposit guarantee coverage, as well as how to set the appropriate levy amount.8 These schemes ensure depositor funds up to a certain limit, protecting stability, confidence and mitigating run and contagion risks (EBA, 2024[64]).9 On the one hand, excluding deposit-taking NBFIs from these frameworks may pose prudential risk, with potential grave consequences for depositors. On the other hand, inclusion, depending on the type of institution, its risk profile, and the levy imposed, could be viewed as imposing unnecessary, disproportionate, or overly costly entry barriers. Thus, this perimeter choice may benefit from balancing prudential and competition considerations. Section ‎3.1.1 discusses these trade-offs.

Third, additional requirements associated with licensing and authorisation may benefit from recalibration in light of digitisation and enabling cross-border competition. That is, requirements originally designed for traditional brick-and-mortar banks may not align with new or evolving business models. For example, local presence obligations, particularly those requiring a physical branch presence, may pose a barrier for digital-only or cross-border challengers. Thus, assessing alternative mechanisms, such as local incorporation, governance and operational oversight, may help achieve equivalent risk mitigation (Ehrentraud, Garcia and Quevedo, 2020[57]). Section ‎3.1.3 discusses Hong Kong (China)’s adoption of digital-only bank licenses and the tailoring requirements in light of digitisation.

2.1.2. Retail lending: competition considerations for prudential regulation

Unlike deposits, lending is not unique to banks or even to financial institutions. In-kind loans occur whenever a consumer purchases a good or service without paying for it in full at the time of sale. Unlike deposit-taking, lending also does not necessarily entail the use of retail consumer funds. Many lenders finance their activities through equity, securitisation, or wholesale markets, rather than relying on retail deposits. As a result, the failure of a lender typically poses fewer direct risks to financial stability or depositor confidence. Nevertheless, prudential oversight of lenders can remain important where credit exposures are large, interconnected, or systemically significant. Accordingly, prudential frameworks for lenders differ across jurisdictions and across lending products.10

Retail lending products can also be grouped into a few widely adopted categories that differ in risk profile, maturity, collateralisation and, consequently, in the prudential treatment they attract.11 Broadly, loans may be secured, where collateral reduces credit risk but introduces valuation and maturity risks (e.g. mortgages), or unsecured, where credit and operational risks are higher but maturities are shorter and prudential requirements lighter.

The following discussion, while not exhaustive, highlights competition considerations in lending. First, in most jurisdictions, lending does not require deposit-taking capacity, so new entrants can often start as lenders only (Ehrentraud et al., 2024[53]). That said, it may be informative to understand the potential challenges these new entrants may face due to their lack of deposit-taking capabilities. In some contexts, this analysis may inform whether specific types of lower-risk deposit products (e.g., time deposits) could be safely opened to support competition in markets where it is observed to be limited. This is discussed further in Section ‎3.1.3.

New entrants that offer lending services without a deposit-taking authority may face disadvantages in accessing capital. Such lenders typically rely on wholesale funding, securitisation, or partnerships with banks.12 Incumbent banks, by contrast, can use retail deposits to fund loan growth, often at a lower marginal cost. Consequently, challengers dependent on costlier funding sources may face higher break-even rates, constraining their ability to compete on loan pricing or offer longer-term credit.

Retail deposits provide multiple advantages compared to other funding sources. They are generally the most cost-effective form of funding and they strengthen customer relationships, including through cross-selling opportunities (ACCC, 2023[40]). Loans funded by deposits may also entail lower prudential risk, especially during periods of economic stress. This is because retail deposits are typically well diversified across many small account holders and are considered relatively stable in terms of liquidity.13 Prudential frameworks often reflect this by treating certain retail deposits as more stable in liquidity metrics (ACCC, 2023[40]).14 It is also worth noting that incumbent banks may benefit from advantages in accessing a wider range of funding sources beyond retail deposits.15

Second, lending-only NBFIs in many jurisdictions are not subject to capital requirements unless designated as systemically important. This balanced approach can be beneficial to enable new entry and innovation.16 Excessively broad capital requirements can create high barriers to entry for new or smaller lenders and, where applicable, limit the competitive pressure new entrants may exert on incumbents. Where prudential concerns are limited, because institutions do not take deposits and thus do not pose the same risks to financial stability, avoiding unnecessary entry costs through disproportionate capital requirements is thus appropriate.

Third, digitisation and NBFI entry have expanded the range of unsecured credit products. NBFIs are a growing and important source of credit globally.17 On the one hand, this may raise new considerations for risk management, as data increasingly substitutes for traditional collateral. On the other hand, research finds that using data to assess creditworthiness can reduce reliance on collateral values, potentially weakening the feedback loop through which swings in asset prices amplify credit booms and busts (Gambacorta et al., 2020[65]). At the same time, reliance on data may introduce new sources of risk, including from data concentration, potentially reinforcing market power when access to large datasets becomes a key competitive advantage.

A prominent illustration of these dynamics is the rapid rise of buy-now, pay-later (BNPL) loans. BNPL offers an alternative to credit cards and bank loans, typically with shorter repayment terms and more flexible conditions.18 BNPL providers challenge incumbents in retail credit, banks and card networks, by offering point-of-sale financing with lower or no interest, fewer fees and seamless digital experiences (OECD, 2025[45]). They offer new ways to assess credit risk and creditworthiness, particularly for borrowers with limited traditional credit histories. This may broaden access and reduce risk, potentially improving stability (Tigges et al., 2024[66]). Factors influencing competition between new entrants and incumbents include the level of bank concentration and the intensity of competition among new entrants (Vives, 2025[67]). Generally, their presence can encourage traditional lenders to innovate, reduce fees, or enhance their digital offerings.

However, BNPL can raise prudential concerns, including those related to bank profitability, borrower overindebtedness, opaque risk transfer and limited credit loss provisioning. Bank profitability may decrease, particularly in markets where customers were underserved, prior to this new entry (Vives, 2025[14]). Borrower overindebtedness may occur where consumers take on multiple BNPL obligations that are not reported to credit bureaus, obscuring aggregate household leverage and repayment capacity. Opaque risk transfer arises when BNPL providers sell or securitise receivables to third parties, potentially complicating oversight of the ultimate credit risk holders. Limited credit loss provisioning reflects the absence of prudential capital buffers or forward-looking requirements comparable to those applied to banks, which can leave BNPL firms vulnerable to losses during stress events (Amici, 2025[68]; Morgan Stanley, 2025[69]).19

Rapid growth in the sector has further raised systemic concerns. As BNPL providers scale up and integrate with the broader financial system, including through partnerships with banks and reliance on securitisation, defaults could propagate through financial markets, heightening contagion risks. During economic downturns, the business model may prove particularly vulnerable to widespread defaults among consumers who have accumulated multiple BNPL obligations (Goulart, 2024[70]). Until recently, BNPL largely remained outside most prudential perimeters, with many jurisdictions only recently extending oversight (Ehrentraud et al., 2024[53]). Supervisory efforts increasingly aim to balance the benefits of innovation and financial inclusion with the need to monitor credit quality, leverage build-up and interconnectedness with the regulated financial system. Box 3 discusses the evolution of the perimeter applicable to BNPL and how considering competition can help calibrate rules.

Box 3. Evolution of the prudential perimeter to BNPL credit and competition implications

The rapid expansion of buy now, pay later (BNPL) credit since 2019 has been driven by e-commerce growth and consumer demand for flexible, short-term financing. BNPL products, typically short-duration and interest-free, have often fallen outside the prudential perimeter. In many jurisdictions, this reflected product design that kept transactions below regulatory thresholds (e.g. loan size, duration, instalments). While this gap spurred entry, innovation and competitive pressure on traditional lenders, it also created prudential and consumer risks. As regulators expand the prudential perimeter to BNPL, balancing oversight with competition may be helpful, particularly through the use of competition impact assessments discussed in Section ‎3.

Australia

Reforms from 2023 brought BNPL under the Credit Act, requiring providers to obtain a licence and comply with responsible lending and disclosure rules. By introducing a new category of “low-cost credit contracts,” the framework aims to proportionally align obligations with BNPL risks while preserving entry and competition.

United Kingdom

HM Treasury’s final position and draft amendments to the Financial Services and Markets Act 2000 will subject BNPL to Financial Conduct Authority authorisation and reporting obligations, including data on credit quality, to enable effective supervision.

European Union

The amended Consumer Credit Directive (CCD2), applicable from 2026, removes exemptions for small loans, bringing BNPL within scope and enabling monitoring of BNPL portfolios and credit risk exposures. In its impact assessment, the European Commission (EC) noted that harmonisation would reduce market fragmentation, enhance cross-border competition and benefit smaller, concentrated national markets. The EC also recognised that increased compliance costs could raise barriers to entry for smaller providers or spur exit by currently unregulated providers.

Singapore

The 2022 BNPL Code of Conduct, developed by the Singapore FinTech Association under the Monetary Authority’s (MAS) guidance, sets standards to mitigate over-indebtedness. Though voluntary, an industry accreditation scheme encourages compliance. MAS continues to monitor developments and may consider a more prescriptive approach if market concentration or prudential risks increase.

From a prudential perspective, these reforms reflect a gradual extension of supervisory oversight, including licensing and reporting requirements in Australia, the EU and the United Kingdom, as well as a voluntary code in Singapore. All reforms aim to bring BNPL providers under frameworks that enable monitoring of credit risk, funding structures and the mitigation of over-indebtedness and systemic risk, while simultaneously ensuring consumers are adequately protected under consumer protection frameworks.

From a competition perspective, BNPL has arguably enhanced consumer choice, lowered credit costs, and increased pressure on incumbent banks and card issuers to innovate. However, as BNPL falls within the prudential perimeter, regulatory design may impact contestability, particularly where incumbent institutions contribute to standard-setting or advocate specific rule designs. The policy challenge is to calibrate prudential rules to manage risks while not inadvertently deterring competition.

Source: Australian Government (2024), Buy Now Pay Later regulatory reforms, https://treasury.gov.au/consultation/c2024-504798; FCA (2025), Regulating Buy Now Pay Later (BNPL), https://www.fca.org.uk/firms/regulating-buy-now-pay-later; HM Treasury (2025),Regulation of Buy-Now, Pay-Later Government Response to Consultation, https://assets.publishing.service.gov.uk/media/6827536302662c6f8ec243c4/250516_-_BNPL_consultation_response_.pdf; European Commission, Commission staff working document impact assessment report accompanying the proposal for a Directive of the European Parliament and Council on consumer credits (2021), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD%3A2021%3A170%3AFIN&locale-en=; European Commission (2023), Consumer Credit, https://commission.europa.eu/business-economy-euro/financial-services/retail-financial-services/consumer-credit_en; Consumer Financial Protection Bureau (2024), Truth in Lending (Regulation Z); Use of Digital User Accounts To Access Buy Now, Pay Later Loans, https://www.federalregister.gov/documents/2024/05/31/2024-11800/truth-in-lending-regulation-z-use-of-digital-user-accounts-to-access-buy-now-pay-later-loans; Federal Register, Interpretive Rules, Policy Statements and Advisory Opinions; Withdrawal, https://www.federalregister.gov/documents/2025/05/12/2025-08286/interpretive-rules-policy-statements-and-advisory-opinions-withdrawal; Monetary Authority of Singapore (2025), Written reply to Parliamentary Question on reports of non-compliance with Buy Now Pay Later (BNPL) Code of Conduct and data on BNPL customers, https://www.mas.gov.sg/news/parliamentary-replies/2025/written-reply-to-parliamentary-question-on-reports-of-non-compliance-with-bnpl-code-of-conduct; Monetary Authority of Singapore (2022), Reply to Parliamentary Question on "Buy Now Pay Later" Schemes, https://www.mas.gov.sg/news/parliamentary-replies/2022/reply-to-parliamentary-question-on-buy-now-pay-later; Ehrentraud, J; Mure, S; Noble, E; Zamil, R (2024), Safeguarding the financial system’s spare tyre: regulating non-bank retail lenders in the digital era, https://www.bis.org/fsi/publ/insights56.pdf; Cornelli, G; Gambacorta, L; Pancotto, L (2023), Buy now, pay later: a cross-country analysis, https://www.bis.org/publ/qtrpdf/r_qt2312e.htm; Xavier Vives (2025),FinTech Competition in Lending https://wifpr.wharton.upenn.edu/wp-content/uploads/2025/10/WIFPR-FinTech-Competition-in-Lending-Vives.pdf.

2.2. Trends toward consolidation and entrenchment

There is a delicate balancing act between safeguarding stability and preserving competitive market structures. As discussed in Section ‎1.2, tensions and trade-offs arise between prudential and competition authorities, particularly when reviewing mergers (which across many jurisdictions is within the purview of both authorities) or in the context of state support, intervention, or state aid (which may fall within the purview of competition authorities in certain jurisdictions). Mergers, while sometimes justified on efficiency or resilience grounds, can contribute to longer-term trends toward consolidation and entrenchment, substantially lessening competition, if not carefully assessed. State support may likewise entrench incumbent advantages by unlevelling the playing field, lowering funding costs in favour of incumbents and discouraging new entry or expansion. Importantly, while tensions are present, both mergers and state support can lead to TBTF institutions and risk financial stability, thereby raising competition and prudential risks, underscoring the need for balancing and co-operation.

The tensions and trade-offs between prudential and competition objectives may be particularly pronounced during periods of financial stress, when prudential authorities may support mergers or other measures to maintain stability short term, even where such interventions risk reducing competition in the short and long term (OECD, 2011[26]; 2021[31]). For example, in the past, competition concerns regarding mergers have been sidelined during crises. Where crisis-driven mergers have occurred, their anticompetitive effects often far outlast the crisis. Box 4 discusses a previous case in which competition concerns were set aside in a merger during a crisis.

Box 4. The merger of Lloyds and HBOS in the United Kingdom

The global financial crisis brought financial stability and competition principles into direct conflict in the proposed Lloyds Banking Group (Lloyds or LBG) acquisition of Halifax Bank of Scotland (HBOS). In late 2008, in response to great market stress, Lloyds agreed to acquire HBOS. The merger was approved in 2009, despite the Office of Fair Trading’s (OFT) opinion that competition problems would flow from the merger.

The OFT advised the Secretary of State to refer the deal for a full competition investigation, citing substantial concerns regarding retail demand deposits, with the merged firm expected to reach around a 30% market share and the loss of a key challenger in Scottish SME banking. In parallel, the Bank of England, the Financial Services Authority (FSA) and HM Treasury urged approval on grounds of financial stability. The Government responded by adding “the stability of the United Kingdom (UK) financial system” to the statutory public-interest grounds to be considered under the Enterprise Act 2002, applicable to merger control. The Secretary of State thus overrode the OFT’s recommendation and cleared the merger on that basis. Shortly afterwards, alongside broader crisis measures, the state injected capital, taking an equity stake in Lloyds.

As a result of the merger, HBOS, the main challenger to the four large established banks in Scotland, was eliminated. As later confirmed by the Competition and Markets Authority’s (CMA) 2016 retail banking market investigation, the combined market share of the largest four banking groups increased as a result of Lloyds TSB’s acquisition of HBOS. Even earlier, in 2010, Sir John Vickers underscored that “the takeover did pose clear risks to competition.” He added that alternative solutions would have been more pro-competitive and that it “would appear to have been a mistake to waive normal merger law . . . Relaxation of competition law was not a good way to help financial stability in this case and as the subsequent problems of LBG have shown, it may have worsened it.” He concluded that, “there is good reason to believe that there needs to be more competition in banking, not less, especially in view of the competitively impaired post-crisis structure.”

Source: Vives, X. (2016), Competition and Stability in Banking: The role of regulation and competition policy, Princeton University Press; CMA (2016), Retail banking market investigation, https://assets.publishing.service.gov.uk/media/57ac9667e5274a0f6c00007a/retail-banking-market-investigation-full-final-report.pdf;The Enterprise Act 2002 (2008), Specification of Additional Section 58 Consideration Order, https://www.legislation.gov.uk/uksi/2008/2645/article/2/made; Department for Business, Enterprise & Regulatory Reform (2008), Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the Competition Commission, the merger between Lloyds TSB Group plc and HBOS plc under Section 45 of the Enterprise Act 2002, https://data.parliament.uk/DepositedPapers/Files/DEP2008-2685/DEP2008-2685.pdf; House of Commons (2008), The Lloyds-TSB and HBOS Merger: Competition Issues, https://researchbriefings.files.parliament.uk/documents/SN04907/SN04907.pdf; Vickers, J (2010), Central Banks and Competition Authorities: Institutional comparisons and new concerns, https://www.bis.org/events/conf100624/vickerspaper.pdf.

Historically, prudential considerations limited the application of competition law to the banking sector. In several jurisdictions, banks were shielded from general merger control on the grounds of systemic stability or sectoral supervision. In France, for instance, bank mergers have been subject to ordinary merger control only since 2003 (Cœuré, 2025[15]). Today, across many jurisdictions, merger control by competition authorities and prudential regulators applies to bank mergers, with close co-operation between the two. Box 5 provides an example of how this co-ordination works in practice in the US.

Box 5. Review of banking mergers in the United States

The Antitrust Division of the Department of Justice independently assesses the competitive effects of proposed bank mergers under the antitrust laws while co-ordinating closely with the federal banking agencies. The Antitrust Division’s review focuses exclusively on competitive factors and does not address the other statutory considerations applied by banking agencies (though competition issues may influence those broader assessments). Importantly, as discussed below, the Antitrust Division may consider the failing-firm defence in its review. Once the Antitrust Division concludes its review, it provides a competitive factors report to the relevant banking agency, which may take those findings into account in its prudential decision-making. If the banking agency grants approval, the Antitrust Division may, at its discretion, challenge the legality of a merger following such approval. A legal challenge by the Antitrust Division suspends the effectiveness of that approval pending federal court review.

Source: US Department of Justice (2024), 2024 Banking Addendum to 2023 Merger Guidelines, https://www.justice.gov/atr/media/1368576/dl; US Department of Justice (2023), 2023 Merger Guidelines, https://www.justice.gov/atr/merger-guidelines/rebuttal-evidence.

However, certain jurisdictions retain provisions implemented after the global financial crisis that allow for the possibility of not submitting mergers to competition authority review. Box 6 discusses a recent such case in Switzerland.

Box 6. The merger of UBS and Credit Suisse in Switzerland

In March 2023, Swiss authorities announced that UBS Group AG would acquire Credit Suisse Group AG in an emergency transaction aimed at restoring confidence in the financial system. The Swiss Financial Market Supervisory Authority (FINMA) approved the deal, noting that it would “secure financial stability and protect the Swiss economy.” To facilitate the takeover, the Swiss National Bank (SNB) provided up to CHF 100 billion in liquidity assistance and the Swiss Confederation offered an additional CHF 100 billion guarantee against potential losses.

The transaction was exempted from the ordinary merger-control process under Article 10(3) of the Swiss Cartel Act (CartA). Introduced after the 2008 crisis, this provision allows the government to bypass full Competition Commission (COMCO) review when a bank merger is “required in the interest of the creditors.” In such cases, COMCO may issue only non-binding advice and FINMA’s approval suffices for completion. The exemption was invoked in this case to expedite the rescue.

In its subsequent public comments, COMCO acknowledged potential competition concerns, particularly in wealth management, corporate banking and investment banking, but confirmed that it had been limited to an advisory role under the emergency procedure. In June 2024, FINMA formally concluded its ex-post review, finding that the merger “does not eliminate effective competition in any market segment” and therefore closed the case without conditions.

Commentators have since observed that the merger created a state-induced institution with significant market power, underscoring that the exclusion of merger control has non-negligible consequences for competition. Time will tell how the merger will affect stability and competition in the long term. However, as underscored by the Financial Stability Board in its Peer Review of Switzerland and discussed further in Section ‎3, enhancing resolution frameworks can provide an alternative to crisis mergers and address material impediments to resolvability. Importantly, recent analysis further warns that resolution practices relying on large incumbents as “white knights” can stabilise markets in the short term but risk reinforcing concentration and reducing contestability, underscoring the importance of ensuring that resolution frameworks themselves do not perpetuate market power.

Taken together, the case illustrates the tension between stability and competition objectives in emergency interventions. While the exemption under Article 10(3) CartA enabled swift action to avert a systemic crisis, the resulting consolidation and potential entrenchment of market power highlight the importance of considering alternative measures or ensuring that exceptional measures remain proportionate, time-bound and subject to transparent ex post assessment.

Source: FINMA (2024), Merger of UBS and CS: FINMA concludes control procedure, https://www.finma.ch/en/news/2024/06/20240619-mm-zusammenschluss-ubs-cs/; Heynen, P; Haekens, J (2023), The Crédit Suisse-UBS Merger: Ceci N’est Pas Competition Law, https://legalblogs.wolterskluwer.com/competition-blog/the-credit-suisse-ubs-merger-ceci-nest-pas-competition-law/; Hirt, O (2023), Swiss regulator rules out UBS antitrust action over Credit Suisse deal, https://www.reuters.com/markets/deals/swiss-financial-regulator-closes-ubs-antitrust-probe-after-credit-suisse-merger-2024-06-19/; FINMA (2023), FINMA approves merger of UBS and Credit Suisse, https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/8news/medienmitteilungen/2023/03/20230319-mm-cs-ubs.pdf?hash=47C921C769CE0100247843DD1E86D106&sc_lang=en; Baumann, C (2024), Comco Demands Deeper Investigation Into UBS Market Power, https://www.finews.com/news/english-news/61615-comco-finma-ubs-market-power-dominance-obligations; Financial Stability Board (2024), Peer Review of Switzerland, https://www.fsb.org/2024/02/peer-review-of-switzerland/; Coeuré, B, H Huizinga, E König, J Krahnen and J Schlegel (2024), Policy Insight 134: Winners and losers in bank resolution: Recent examples and a modest reform proposal, CEPR Policy Insight No 134, CEPR Press, Paris & London. https://cepr.org/publications/policy-insight-134-winners-and-losers-bank-resolution-recent-examples-and-modest.

As discussed in Section ‎1.3, concentration, coupled with limited entry and entrenchment of incumbent banks, has been a persistent feature across jurisdictions (Philippon, 2017[52]). Successive merger waves have increased concentration across jurisdictions.20 Evidence from past decades shows that while mergers may sometimes deliver benefits, efficiency gains have been modest, while market power motives are often the dominant rationale for mergers (Federal Reserve, 1999[71]). DeYoung and Whalen (1999[72]) underscore that consolidation may often have been driven by the pursuit of TBTF status and that it can harm borrowers, depositors and other stakeholders. Philippon (2017[52]) argues that this has contributed to poor overall efficiency and excessive rents.

More recently, concerns have emerged that consolidation trends extend beyond traditional banking, where incumbents acquire FinTechs and other innovators rather than developing competing technologies internally (Marty and Warin, 2020[73]; AdC, 2021[74]). Such acquisitions, sometimes described as “killer acquisitions” or “reverse killer acquisitions,” may allow incumbents to absorb potential rivals and slow or steer disruptive innovation, entrenching market power across adjacent markets (Crawford, Valletti and Caffarra, 2020[75]; Cunningham et al., 2021[76]; OECD, 2020[77]). While some transactions have promoted diversification or resolved failing institutions, efficiency gains have not always been passed through to consumers. In sum, consolidation reshapes market structures but has not consistently improved performance (DeYoung and Whalen, 1999[72]). Box 7 discusses evidence from Japan.

Box 7. Evidence of bank mergers from Japan

In the late 1990s, Japan experienced the failures of large banks. As financial conditions deteriorated, several of the remaining institutions chose to merge, seeking to strengthen efficiency and resilience in order to avert further failures. At the time, with capital positions weakened by non-performing loans and declining asset values, consolidation was viewed as a means to stabilise balance sheets through economies of scale.

However, ex post evidence underscores that these mergers generated few measurable efficiency gains and did not materially improve the financial soundness of the institutions involved. Empirical analyses of the period reveal two key findings:

• Financial soundness was largely inherited from pre-merger institutions. That is, sound banks merged into sound entities, while weaker banks remained fragile post-merger, suggesting that consolidation itself added little intrinsic value.

• Some merged banks experienced a decline in distance-to-default immediately after consolidation, implying that the mergers may have weakened rather than strengthened solvency in the short term.

These findings are consistent with the view that many of the mergers were motivated less by efficiency gains than by a desire to benefit from an implicit too-big-to-fail policy. Alternatively, they may reflect an implementation gap: where mergers pursued for efficiency failed to achieve genuine operational improvements. Overall, Japan’s experience illustrates the limitations of consolidation as a prudential policy response during systemic stress.

Source: 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.

That said, at times, emergency combinations can be the least-bad option to preserve stability in the short term. This is why competition-based merger control can consider the risk of an institution's failure under the failing-firm defence. In other words, competition law recognises, through the failing-firm defence, that a merger may be the “lesser of two evils” (SCOTUS, 1974[78]).

The failing-firm defence, as adopted by many jurisdictions, generally requires three cumulative conditions: (i) exit is imminent absent the merger; (ii) no less anti-competitive alternative exists; and (iii) the assets would otherwise leave the market (OECD, 2010[79]). In practice, this means that a merger that would otherwise substantially lessen competition may proceed if these strict conditions are all met. However, because mergers can significantly shape competition in the long term, the bar for invoking this defence should remain high and carefully scrutinised. Lowering the standard to, for example, weaker claims based on “flailing firm” or “weakened competitor” arguments risks normalising consolidation and embedding market power. This underscores the need for close co-operation between prudential and competition authorities to avoid zero-sum trade-offs, as discussed in Section ‎3.

While consolidation is relevant to competition and prudential objectives more broadly, consolidation and the potential for entrenchment also give rise to potential TBTF institutions. As aforementioned, studies have found that consolidation may often have been driven by the pursuit of TBTF status (DeYoung and Whalen, 1999[72]; Harada, 2008[80]). TBTF policies constitute a form of state aid because there is an implicit guarantee of help. TBTF institutions are of concern to both prudential regulators and competition authorities because they distort stability and competition. Prudentially, the distress of a very large or highly interconnected firm endangers the continuity of critical functions, magnifies contagion and complicates resolution. From a competition perspective, expectations of public support can operate like an implicit subsidy, unlevelling the playing field by reducing funding costs for incumbents and weakening pressure from smaller rivals (Vives, 2016[4]).

In other words, when state support disproportionately benefits incumbents, it can unlevel the playing field by conferring selective advantages, such as lower funding costs or explicit guarantees, that are not equally available to challengers. Such interventions can undermine the principle of competitive neutrality, which seeks to ensure that public measures do not distort market competition or favour specific firms (OECD, 2024[81]). Rather than picking winners and losers in the market, which can misallocate resources and undermine stability and contestability, competitive neutrality ensures competition is not distorted.

This distortion can be amplified when past or prospective state aid generates moral hazard. By contrast, competitive markets, supported by rigorous merger control, limits on state aid and credible exit paths, can reduce the market power of any single firm and compress the rents that may make TBTF status attractive. That is, competition policy can be part of the solution to the TBTF problem by avoiding the consolidation of an anticompetitive market structure that leads to a TBTF entity, or by assessing state aid to mitigate distortions to competition. Box 8 discusses the EU’s use of the latter. Accordingly, prudential and competition authorities share a common objective: to prevent the rise of TBTF institutions, preserve a level playing field and ensure that failures are manageable without distorting market outcomes.

Box 8. The European Union’s approach to state aid control

Under Articles 107–109 of the Treaty on the Functioning of the European Union (TFEU), public support granted by a Member State or through state resources must not distort competition or trade within the EU single market by favouring certain undertakings or the production of particular goods. “State aid” encompasses any selective advantage provided by public authorities, such as grants, state-guarantees or interest-free loans, tax relief, or access to goods and services on preferential terms.

The EC is responsible for assessing whether such measures are compatible with the internal market. Aid may be authorised where it serves an objective of common interest, such as preserving financial stability, provided the measure is necessary and proportionate and is accompanied by safeguards to limit distortions of competition.

During and after the global financial crisis, the EC applied these principles through a series of crisis communications, including the 2013 Banking Communication. This aimed to ensure that support for financial institutions was strictly limited to what was needed to maintain stability and often combined restructuring and behavioural commitments to mitigate competitive distortions and moral hazard. By controlling and monitoring State aid, the EC aims to help maintain a level playing field in the EU internal market, ensuring that firms compete on their merits rather than on preferential public support.

Since then, these principles have been reinforced through the Bank Recovery and Resolution Directive (BRRD), which hardwires resolution rules into EU law to reduce reliance on taxpayer-funded rescues. However, the BRRD’s implementation has at times been uneven, with several bank resolutions handled under national insolvency regimes rather than EU procedures. This has raised concerns about consistency and competitive neutrality.

Source: Official Journal of the European Union (2013), Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis ( ‘Banking Communication’), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013XC0730(01); European Commission (2025), State Aid, https://commission.europa.eu/topics/competition/state-aid_en; Humblet, M; Dutillieux, W (2025), State Aid in Financial Services: An Overview of EU Policy, https://www.concurrences.com/en/bulletin/special-issues/state-aid-financial-services/state-aid-in-financial-services-an-overview-of-eu-policy; Vives, X. (2016), Competition and Stability in Banking: The role of regulation and competition policy, Princeton University Press; Official Journal of the European Union (2014), Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, https://eur-lex.europa.eu/eli/dir/2014/59/oj/eng; Famfollet, J; Sankotová, E (2020), Italian bank crisis: Flexible application of BRRD rules, or a bailout in disguise?, https://doi.org/10.2478/revecp-2020-000; Asimakopoulos, I and Howarth, D (2022), Stillborn Banking Union: Explaining Ineffective European Union Bank Resolution Rules; https://onlinelibrary.wiley.com/doi/pdf/10.1111/jcms.13212.

2.3. NBFI entry through bank-partnerships

Partnerships between NBFIs and banks, including white-labelling arrangements with BigTechs and FinTechs, where a licensed bank provides the regulated balance-sheet and infrastructure while the NBFI partner controls the customer interface under its own brand, have become increasingly common (OECD, 2025[45]). A potential consideration arising from the widespread adoption of partnerships is whether prudential requirements may be unnecessarily channelling new entrants into partnerships, by limiting the possibility of independent entry and expansion, thereby creating both competition and prudential concerns.

Table 2 illustrates BigTech and large FinTech service offerings, mapping their licensing and partnership models across jurisdictions. Importantly, partnerships between smaller FinTechs and banks are even more frequent, particularly in the provision of deposit services (Barakova, Ehrentraud and Leposke, 2024[63]). For example, in the US, a 2022 study found that almost two-thirds of banks had established at least one partnership with a FinTech firm over the preceding three years, a share that is expected to continue rising (US Treasury, 2022[55]; Synctera, 2022[82]).

Table 2. BigTech and large FinTech licenses and pathways to entry across jurisdictions

Tech firms	Bank partnership: Deposits	Bank partnership: Lending	Independent entry: Deposits	Independent entry: Lending	Banking license
Apple	US			UK, US
Amazon		EU, India, US		UK, US
Ant Group		People’s Republic of China (China)		China, UK	China, Hong Kong (China), Singapore
Google		India
Paypal	US	India, US			EU
Mercado Libre			Mexico*	Argentina, Brazil, Colombia, Mexico
Meta		India
Nubank			Mexico**	Brazil, Mexico**	Mexico
Tencent		China			China, Hong Kong (China)

Note: (*) In payments, where funds are not swept automatically to a user’s linked deposit account (i.e., pass-through mobile payment services), providers may earn money when users store funds on their platforms by holding and investing funds (i.e., staged mobile payment services). In this way, staged payment services can be perceived as a form of deposit. Use of staged mobile wallets as deposit-like products is prevalent in jurisdictions like Mexico. Thus, based on prudential policy objectives, staged mobile payments may be subject to more oversight and insurance requirements than pass-through mobile payments. (**) In 2025, Nubank received a full banking license to operate in Mexico; prior to that, it held a deposit-taking license.

Source: Adapted from Barakova, I., J. Ehrentraud and L. Leposke (2024), A two-sided affair: banks and tech firms in banking, https://www.bis.org/fsi/publ/insights60.htm; Nubank (2025), Nu Mexico receives banking license approval, paving the way for product portfolio expansion and increased financial inclusion, https://international.nubank.com.br/company/nu-mexico-receives-banking-license-approval-paving-the-way-for-product-portfolio-expansion-and-increased-financial-inclusion/; 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.

While partnerships between banks and NBFIs can accelerate innovation and broaden consumer choice, they may also raise both competition and prudential concerns. From a competition perspective, they may reinforce incumbents’ advantages, as challengers depend on the very institutions they aim to disrupt. This dependency can reduce competitive intensity, enable collusion and may facilitate anticompetitive practices such as tying, bundling, leveraging or foreclosure (OECD, 2025[45]). Competitive intensity is particularly diminished because challengers often compete at the margins rather than directly with incumbents. Thus, partnerships mitigate the competitive benefits of new entry by shifting the focus from rivalry to co-operation. This can also lead to innovation being limited or steered toward incumbent-defined paths, thereby reinforcing entrenched market power.

Partnerships also raise prudential concerns. Partnerships blur the boundary between regulated and unregulated activity, creating interdependencies and shifting risks across the regulatory perimeter. They also complicate prudential supervision by reducing transparency about where risks ultimately reside (BCBS, 2025[83]). In practice, prudential blind spots and weakened competition can reinforce one another: opacity obscures risk allocation, while dependency entrenches incumbents, including by potentially giving them leverage over market access under the guise of stability.21

Banks benefit from deep expertise in prudential regulation and compliance that new entrants can struggle to replicate. Regulatory familiarity enables incumbents to absorb compliance costs and maintain their central role in credit and deposit markets. As a result, many new entrants in deposits and lending increasingly avoid being subject to prudential regulation by relying on partnerships with banks for access to regulated financial activities. In this sense, prudential regulations perceived as burdensome, restrictive, or too capital-intensive may channel new entry into partnerships. That is, partnerships can be a direct consequence of the comparative advantages that incumbents retain in regulatory compliance (Feyen et al., 2021[84]). Thus, considering simplification, proportionate and predictable requirements can help preserve space for independent, well-supervised entry. Box 9 discusses the UK’s “Strong and Simple” prudential framework.

Box 9. The United Kingdom’s “Strong and Simple” prudential framework

Between 2023 and 2025, the Bank of England and Prudential Regulation Authority (PRA) set out and progressed the “Strong and Simple” prudential framework through final rules and consultation. The package of measures is aimed at maintaining financial sector stability while offering new opportunities for competition and growth. The Prudential Regulation Authority (PRA) proposed these measures to mitigate the ‘complexity problem’ that may arise when the same prudential requirements are applied to all firms of different sizes and business models by simplifying the prudential framework. As acknowledged by the PRA in its review of its prudential frameworks, complex rules may deter smaller firms from growing in size or breadth of activities, potentially reducing competition. The updated regime aims to advance the PRA’s safety and soundness and secondary competition objectives.

According to the PRA, the Strong and Simple framework forms part of a phased approach to delivering a more proportionate prudential regime for smaller firms, while maintaining alignment with international standards such as Basel, where appropriate. The framework aims to simplify compliance and reduce unnecessary regulatory burden without compromising the resilience of individual institutions or the wider financial system

Source: Bank of England (2024), Strong and Simple – completing the picture - speech by David Bailey, https://www.bankofengland.co.uk/speech/2024/september/david-bailey-speech-at-building-societies-association; Bank of England (2023), Operating the Small Domestic Deposit Taker (SDDT) regime, https://www.bankofengland.co.uk/prudential-regulation/publication/2023/december/small-domestic-deposit-taker-regime; Bank of England (2024), The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs), https://www.bankofengland.co.uk/prudential-regulation/publication/2024/september/strong-and-simple-framework-the-simplified-capital-regime-for-sddts-cp; Bank of England (2023), The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements, https://www.bankofengland.co.uk/prudential-regulation/publication/2023/december/strong-and-simple-framework-policy-statement.

Notes

← 1.  For example, the OECD in its Competition Market Study of Tunisia’s Retail Banking Sector found that the licensing process for payment service providers creates unnecessary barriers to entry, by introducing capital requirements that are between 12 and 76 times higher than capital requirements for similar service providers in the EU (OECD, 2023[58]).

← 2.  Modern international prudential standards, applicable to financial institutions, have evolved over more than three decades, driven by successive crises that exposed weaknesses in prudential rules. The key standards include:

Basel I (1988) was the first internationally agreed framework, focusing primarily on prescribing minimum capital requirements for financial institutions to reduce credit risk. Under this framework, assets are classified according to their risk level and financial institutions are required to maintain at least 8% of their determined risk profile on hand.

Basel II (2004) expanded the capital framework through its “three pillars” approach, including: (i) minimum capital requirements with more risk-sensitive methodologies, (ii) supervisory review and (iii) market discipline measures enabled through disclosure (BIS, 2005[132]).

The 2007-2009 global financial crisis revealed shortcomings in capital quality, liquidity management and the absence of systemic risk tools. For example, while Basel II intended to align capital more closely with risk, its reliance on regulated institutions’ internal models later drew criticism for underestimating some exposures and contributing to undercapitalisation in the lead-up to the global financial crisis (White, 2014[11]).

In response, Basel III (2010) enhanced existing risk-based capital rules and imposed new requirements on leverage, liquidity and significant exposures. Other important measures include more intensive supervision, resolution regimes and resolvability requirements for systemically important firms. In addition, enhanced accounting standards have been adopted to prompt banks to recognise credit losses earlier in the credit cycle. The reforms also introduce a macroprudential overlay aimed at limiting systemic risk, including countercyclical capital buffers and other macroprudential measures.

Established by the Basel Committee on Banking Supervision (BCBS), the fundamental objective of the Basel standards is to ensure consistent prudential requirements across jurisdictions, thereby maintaining a global level playing field and fostering global financial stability. As of 2025, more than 100 jurisdictions have committed to implementing Basel III standards through national legislation (Hohl et al., 2018[8]). However, the degree and pace of adoption vary across jurisdictions (Coelho, Restoy and and Zamil, 2020[133]). Currently, many jurisdictions are implementing the final elements of Basel III. Differences in adoption have been identified as a source of market fragmentation. Such fragmentation not only undermines global prudential consistency but may also weaken competition by discouraging cross-border entry.

← 3.  Different types of deposits include:

• Demand deposits. Funds are held “at call,” which means that customers can access funds held within these accounts at any time, instantly, on demand. Typically, deposit accounts are those where customers receive income and other funds and from which they conduct everyday financial activities such as paying bills, groceries, entertainment, etc. For this reason, transaction accounts are also known as current accounts. They are also typically linked to debit cards. These accounts often have high cash flow rates. That is, often receiving funds such as income and depleting funds until the next pay cycle (ABA, 2023[113]; Federal Reserve, 2025[114]).

• Savings accounts. Funds are held “at call,” and customers can typically access funds on demand, nearly-instantly. However, these accounts usually cannot be linked to a debit card, which means they need to be transferred from the savings account to be used for purchases. Direct debits are typically not possible from these accounts either. The benefit of these products is that they tend to accrue higher interest than transaction accounts. Thus, customers usually use these accounts to build up a pool of savings (Siroto, 2025[99]; Federal Reserve, 2025[114]).

• Term (or time) deposits. Funds are typically held within the deposit account for an agreed period. This is a savings account that allows customers to receive higher interest rates in return for the unavailability of the money for a specified period of time. If needed, customers can recover the funds placed in the term account before the expiration date, but this typically entails penalties, as outlined in the initial contract. An example of a term deposit is a certificate of deposit (Federal Reserve, 2025[114]; Service Public, 2025[115]).

Retail deposit products typically have different interest rate structures. The rate a consumer receives may depend on their available balance and its size, as well as other personal characteristics, including how they use the product. Interest rates namely apply to savings accounts and term deposits, as transaction accounts tend to have negligible or no interest rates available (ACCC, 2023[40]). Examples include:

• Base interest rates. These rates are generally available to all holders of deposit products; they represent the minimum or base interest rate available.

• Introductory interest rates. These rates are offered when a customer opens an account and are typically higher than the base interest rate with a short initial duration.

• Bonus interest rates. These are conditional interest rates that are added on top of the base interest rate if a consumer meets certain conditions, such as growing the account balance to a certain amount, making a certain number of transactions, or limiting withdrawals.

• Headline interest ratesThese represent the total interest rate for a deposit product, including the base interest rate and any introductory or bonus interest rates.

• Fixed-term interest rate. Term deposits typically have fixed interest rates which do not change during the duration of the fixed term.

• Tiered interest rateThese rates may apply and vary depending on the deposit balance.

← 4.  Diverging licensing regimes may include:

• Full banking or omnibus licenses allow for both deposit-taking and lending, amongst other services. This type of license carries the highest prudential obligations, including compliance with capital, liquidity, leverage and governance standards. It also frequently requires participation in deposit guarantee schemes.

• Monoline licenses permit a single service to be conducted by a licensed entity (Ehrentraud et al., 2024[53]).

• Deposit-taking licenses are typically required across jurisdictions for institutions that accept retail deposits from the public. They often impose entry requirements, such as minimum initial capital requirements or leverage standards, reflecting the systemic importance of deposits. Across most jurisdictions, monoline licenses are not available for deposits. Typically, if these are available, it is for certain types of limited deposits, such as term (or time) deposits, but not demand deposits.

• Credit-only licenses are available in some jurisdictions for institutions that engage solely in lending without deposit-taking. Prudential obligations are typically lighter. These may include lower or no capital thresholds, minimal liquidity requirements, or no leverage ratios. However, these institutions may face higher funding costs without access to deposits, which would hinder their ability to provide loans.

← 5.  For example, in Australia, Brazil, the People’s Republic of China (China), Colombia, Hong Kong (China), India, Singapore, South Africa, the UK and the US, entities that take demand deposits are required to hold a banking license (Ehrentraud et al., 2024[53]; Federal Reserve, 2025[114]; PRA, 2025[116]). A notable exception is Argentina, where the Central Bank currently allows NBFIs to accept both demand and term deposits (Ehrentraud et al., 2024[53]; Central Bank of Argentina, 2024[100]; Ministry of Justice of Argentina, 1977[101]). In Argentina, pursuant to Article 24 of Law No. 21.526, finance companies are permitted to accept time deposits, while demand deposits are not mentioned as a permissible activity. However, Article 20 allows the Central Bank of Argentina to expand the scope of activities that finance companies may undertake. Based on this power, the central bank currently allows finance companies to accept time and demand deposits (Ehrentraud et al., 2024[53]). Argentina’s economic policy is unique: the Central Bank is reengineering domestic regulation to restore macroeconomic stability and overcome shallow financial markets, with the aim of crowding in private-sector credit while preserving stability (Central Bank of Argentina, 2025[105]).

← 6.  In the EU, generally, any person other than a bank is prohibited from taking deposits or other repayable funds from consumers. However, national exemptions apply.

← 7.  For example, deposit-taking NBFIs in India are required to obtain an investment-grade rating or higher on an annual basis. If a deposit-taking NBFI loses its investment grade rating, it cannot renew existing or solicit new term deposits (Reserve Bank of India, 2025[110]; Ehrentraud et al., 2024[53]). These conditions can themselves act as bottlenecks to competition and thus may also be crafted with balance in mind. For example, while requiring external ratings helps investors gauge risk, reliance on credit ratings also raises concerns and can introduce competition distortions (Camanho, 2020[102]; Bongaerts, 2014[103]; Crenshaw, 2023[104]; Bush, 2022[137]).

← 8.  For example, in India and Hong Kong (China), NBFI deposits are not covered by deposit guarantee schemes, although these companies are allowed to offer term deposits. Other jurisdictions, such as Argentina, Brazil, Colombia, New Zealand and Singapore, cover NBFI deposit holders under deposit guarantee schemes.

← 9.  A deposit guarantee scheme or deposit insurance is a system designed to protect depositors and provide insurance for their funds. It is a safety net that ensures, up to a certain level, of deposits will always be repaid, even if the bank holding them fails or goes insolvent (EBA, 2024[64]). Participating institutions usually fund the scheme through contributions.

← 10.  Prudential regulations for retail lending vary widely. Some jurisdictions extend all elements of the banking prudential framework to NBFIs. Others focus mainly on conduct and consumer protection. In some countries, multiple licences are required to carry out all lending activities; in others, a single authorisation is sufficient. In some cases, certain credit products may be unregulated or only subject to registration requirements (Ehrentraud et al., 2024[53]). For example:

• Omnibus credit licenses. In Argentina, Australia, Japan, Brazil, Mexico, Indonesia, Hong Kong (China) and Singapore, NBFI lenders who hold the relevant omnibus credit license are enabled to offer all credit types (Ehrentraud et al., 2024[53]).

• Monoline credit licenses. In Egypt, Sweden and the US, monoline licenses are available depending on the type of credit an NBFI is keen to offer (Ehrentraud et al., 2024[53]).

• Registration. In Argentina, Colombia and South Africa, NBFIs do not require a license, but need to register with the relevant authority to operate (Ehrentraud et al., 2024[53]).

• No license or registration. Many jurisdictions do not require either a license or registration for NBFI lenders. Moreover, across jurisdictions, NBFIs often operate without licenses: instead, credit is provided in partnership with banks, as discussed in Section ‎2.1.

← 11.  Different types of loans include:

• Secured loans. A secured loan is backed by collateral, which can be the asset that the loan is financing (e.g., a house or a car) or another form of pledged property. The purpose of collateral is that if a borrower defaults on a loan, the lender can take possession of the collateral to recoup their losses. Secured loans are typically for a term, repaid in instalments until the loan is paid in full at the end of its term (van Hoenselaar et al., 2021[141]).

• Unsecured loansAn unsecured loan does not require any collateral. Lenders generally rely instead on a borrower’s creditworthiness and income to assess repayment risks of providing a loan. Common examples include personal loans, personal lines of credit, student loans and credit cards. Unsecured loans can be revolving or for a term (FSB, 2011[125]).

• Revolving loans. These loans are open-ended credit lines; they have credit limits that can be spent, repaid and then spent again. A credit card or an overdraft on a deposit account is an example of a revolving unsecured loan.

• Term loans. These loans are repaid in instalments until the balance is paid in full at the end of the term.

Interest rates for loans also vary, including by loan and risk type. They represent the amount a lender charges a borrower and this is typically a percentage of the principal amount loaned. The perceived risk of a borrower defaulting on a loan is generally part of the calculation of the interest rate. If a borrower is perceived as low risk, this usually means a lower interest rate. If the loan is considered high risk, then the borrower is charged a higher rate.

Secured loans typically offer a lower interest rate, given that collateral is provided, lessening the perceived risk. In contrast, unsecured loans usually have higher interest rates, as the lack of collateral augments the perceived risk. Moreover, interest rates may be fixed or variable. Fixed interest rates remain constant throughout the term of a loan, while variable interest rates may vary based on market conditions. For example, credit cards often have variable interest rates. Some jurisdictions, however, may impose minimum or maximum rates, or other limits to interest rates, according to the relevant type of product (FasterCapital, 2025[106]).

From a prudential perspective, secured loans generally carry lower risks due to collateral. However, they do expose lenders to collateral valuation risks and longer maturities (e.g. mortgages). Unsecured loans tend to have higher credit and operational risks but shorter maturities and thus may be subject to lighter prudential treatment, including for non-banks. In other words, these distinctions may justify different licensing and capital regimes across jurisdictions.

← 12.  Wholesale funding refers to raising funds from institutional investors and financial markets. Securitisation involves pooling assets, such as mortgages, credit card receivables, or other loans and issuing interest-bearing securities backed by that pool (ACCC, 2023[40]).

← 13.  Some NBFI activities may resemble shadow banking insofar as they replicate credit intermediation outside the full prudential perimeter. These risks are typically associated with wholesale markets, securitisation and money market funds. As such activities differ from the retail deposits and lending focus of this paper, they are not explored further in this paper.

← 14.  Since 2007, banks in many jurisdictions have shifted their funding mix away from short-term wholesale debt and securitisation toward deposits. This reflects a post-crisis reassessment of liquidity risks, as banks recognised the vulnerability of unstable short-term markets and the introduction of prudential reforms, such as the liquidity coverage ratios (LCR) under Basel III, that incentivise more stable, deposit-based funding structures (ACCC, 2023[40]; BCBS, 2024[87]).

← 15.  In many jurisdictions, large banks often enjoy lower funding costs in wholesale debt markets than smaller banks, for example. This may reflect credit rating agencies’ assessments of their broader diversification, scale and the perceived likelihood of government support, which can translate into higher ratings. As a result, larger banks may secure wholesale funding on better terms and, in some cases, can also access international markets more easily due to stronger ratings, name recognition and the ability to issue larger, more liquid instruments (ACCC, 2023[40]). In addition, another advantage present for incumbent banks, when certain regulatory conditions are met, is that securitisation may lower the amount of capital a bank must hold against those exposures, which can, in turn, free up balance sheet capacity to support additional lending or growth (ACCC, 2023[40]; BoE, 2023[111]).

← 16.  In some jurisdictions, for example, regulators impose minimum paid-up capital thresholds, leverage or liquidity limits in lieu of capital requirements to non-deposit-taking NBFIs of a certain size. As discussed further in Section ‎3, India’s scale-based framework is an example of a system that imposes such a prudential requirement (Reserve Bank of India, 2025[110]). Other jurisdictions focus on conduct supervision without specific capital rules, as deemed necessary, depending on the lending product (Ehrentraud et al., 2024[53]).

← 17.  In 2022, NBFIs, including BigTechs and FinTechs, held a 22.5% share of all credit assets, compared with banks’ 65.5% (Ehrentraud et al., 2024[53]). BigTechs overtook FinTechs in credit provision in 2023 (Cornelli et al., 2023[142]).

← 18.  Peer-to-peer lending, crowdfunding and multiple other sources of credit, fueled by digitisation, have also risen in recent years. However, these types of lending are kept out of the scope of this paper (Ehrentraud et al., 2024[53]).

← 19.  BNPL also raises consumer protection risks. For more information, see the Council report on the implementation of the OECD Council Recommendation on consumer protection in the field of consumer credit: note by Secretary General (OECD, 2025[135]).

← 20.  For example, in the US and EU Member States, the number of banks declined both before and after the global financial crisis (Vives, 2016[4]). Notably, in the EU, concentration has increased significantly in local markets. For the avoidance of doubt, this assessment does not take a position concerning cross-border mergers. Where the merging firms do not compete in the same geographic markets, such combinations may constitute entry or increased competitive pressure into new geographies and may be pro-competitive or competition-neutral where local overlaps are non-existent or limited, and no other potential for the substantial lessening of competition is found. That said, facilitating foreign bank or foreign NBFI entry into markets through well-calibrated regulation, rather than limiting entry paths for foreign banks to acquisitions, may be a more pro-competitive alternative (Anginer et al., 2019[18]).

← 21.  A further challenge is the limited visibility regulators have into these partnerships, making it difficult to assess and monitor their risk (BCBS, 2025[83]). Recognising this, regulators in multiple jurisdictions have begun systematic reviews, including the European Supervisory Authorities (ESAs) 2024 review of BigTechs in finance and the US Federal Banking Agencies’ consultation on bank–fintech arrangements (Barakova, Ehrentraud and Leposke, 2024[63]). The ESAs highlighted the difficulty of identifying appropriate supervisory counterparts across borders, pointing to the need for stronger co-operation between prudential and competition authorities (ESAs, 2023[126]).