Balancing prudential regulation and competition considerations in banking

3. Opportunities to enhance balance and complementarities

This Section first discusses considerations potentially relevant to balancing prudential and competition objectives. These include the in-or-out trade-off, exit frameworks and competition considerations for licensing, including capital adequacy requirements, the scope of permissible activities and participation in deposit guarantee schemes. It then discusses concrete examples of how competition policy and enforcement may support prudential objectives. The Section concludes by highlighting potential approaches to strengthen co-operation between prudential regulators and competition authorities.

3.1. Considerations for balancing prudential regulation and competition

3.1.1. Addressing the “in or out trade-off”

A key challenge in aligning prudential design with competition is the “in-or-out” trade-off: whether new entrants fall within or outside the supervisory perimeter. If the perimeter is too narrow, large or rapidly growing new players may remain outside prudential oversight, creating blind spots and potential systemic vulnerabilities. Conversely, if the perimeter is too broad, all entrants may face disproportionate obligations, regardless of their size, business model, or risk profile, which could discourage entry and entrench incumbents. The effectiveness of this balance may benefit from approaches that move beyond binary choices and that are regularly reassessed. Box 10 discusses activity-based vs. entity-based regulations.

Box 10. Activity-based vs. Entity-based regulation

Policymakers are increasingly debating the merits of activity-based versus entity-based regulation. Activity-based regulation applies the same requirements to a service, regardless of who performs it. Such frameworks are often viewed as promoting consistency across entities and limiting opportunities for regulatory arbitrage between banks and non-banks. Yet, without sufficient proportionality, activity-based regimes may also place greater compliance demands on smaller or less complex providers, potentially affecting market entry. Entity-based regulation, by contrast, imposes requirements on specific firms or types of institutions, reflecting their scale, complexity and systemic interconnectedness. This model can capture risks arising from the combination of multiple activities within large groups and can extend oversight to significant new entrants without necessarily subjecting all participants to the same prudential obligations.

Each approach has distinct strengths and limitations. Activity-based regulation tends to enhance consistency across providers of similar services but may not fully capture intra-group linkages that can amplify shocks across business lines. It may also affect market dynamics if rules are calibrated primarily with larger incumbents in mind. Entity-based regulation can address some of these risks but may lead to differences in treatment across providers, particularly if only certain firms (such as BigTechs) are designated for entity-level oversight while others offering similar services remain under activity-based rules. That said, in some circumstances, differentiation in regulatory treatment between larger and smaller entities has been considered necessary to safeguard contestability, though this requires careful calibration and periodic review. By imposing obligations on specific firms (usually those with significant market power), such frameworks can influence competitive dynamics by shaping conditions for market access and entry.

In practice, many prudential regimes combine elements of both approaches, and the relative emphasis placed on each can affect the balance between competition, innovation and prudential outcomes. A combination of the two is often implemented through proportionate thresholds and adaptive frameworks. In some jurisdictions, activity-based requirements provide a common baseline for entities performing similar functions, while entity-based measures are applied to firms that meet defined criteria related to scale, interconnectedness, or systemic relevance. In this way, smaller participants operate under proportionate expectations, while larger entities (whose distress could have broader systemic effects) are subject to more intensive oversight. Regular review of such frameworks helps ensure that the regulatory perimeter remains appropriate in light of market developments and emerging risks.

Source: Borio, C; Claessens, S; Tarashev, N (2022), Entity-based vs activity-based regulation: a framework and applications to traditional financial firms and big techs, https://www.bis.org/fsi/fsipapers19.pdf; OECD (2024), Competitive Neutrality Toolkit: Promoting a Level Playing Field, OECD Publishing, Paris, https://doi.org/10.1787/3247ba44-en.

Static rules risk creating new loopholes or unnecessarily discouraging market entry or expansion. In turn, dynamic approaches, such as licensing that scales requirements as firms grow, or periodic reviews of systemic designations, may better align prudential objectives with competition. For example, certain jurisdictions apply scale-based or proportional prudential regimes for NBFIs. Box 11 discusses the approaches of India and Brazil.

Box 11. Scale-based prudential regimes

India

The Reserve Bank of India (RBI) introduced a scale-based regulatory (SBR) framework for NBFIs in 2021, which came into effect in 2022 and was updated in 2023. The SBR framework organises NBFIs into four layers, depending on their activity, asset size and perceived riskiness.

• Base layer: Smaller non-deposit-taking NBFIs fall into the base layer and face simpler requirements, such as a leverage ratio and basic disclosure rules.

• Middle layer: All deposit-taking NBFIs, as well as larger non-deposit-taking NBFIs above INR 1,000 crore in assets and activity-based lenders such as housing finance and microfinance companies, are placed in the middle layer, subject to capital, liquidity, provisioning and governance standards.

• Upper layer: This layer captures systemically significant NBFIs, including the ten largest by assets, which are required to meet bank-like prudential requirements with adjustments, including an equity ratio of at least 9%, internal capital adequacy assessment processes and large exposure limits.

• Top layer: This layer is expected to remain empty but can be activated at the RBI’s discretion if particular NBFIs are seen as generating excessive systemic risks, triggering higher capital requirements and enhanced supervisory engagement.

By tailoring obligations to the scale and activity of NBFIs, the SBR framework allows smaller entities to operate under proportionate requirements while ensuring that systemically important firms are subject to more robust safeguards.

Brazil

Brazil applies a system-wide proportionality framework to all credit institutions, including NBFI retail lenders. Under the Central Bank of Brazil’s segmentation approach, institutions are classified into five segments (S1-S5), based on their systemic importance and international activity. Prudential requirements, including capital, liquidity, governance, risk management and large exposures, apply to all, but with increasing stringency by segment. The largest, most systemically important institutions (S1 and S2) face Basel-aligned requirements, while smaller non-banks with simple risk profiles (S5, less than 0.1% of GDP) face simplified obligations. Macroprudential measures, such as the countercyclical capital buffer, apply to NBFIs in S1–S4, where relevant, ensuring that larger NBFIs are incorporated into the macroprudential perimeter. In addition, recent reforms, with phased implementation from 2023 to 2025, have expanded group-wide prudential regulation to include new financial conglomerates, including those involving payment institutions. This proportional segmentation aims to avoid a “one-size-fits-all” approach while ensuring that systemic entities are subject to prudential oversight.

These approaches provide illustrative examples of flexible pathways for embedding proportionality into NBFI prudential regulation and enabling competition. India’s SBR is tailored specifically for NBFIs, with the flexibility to escalate requirements if systemic risks arise. Brazil’s segmentation applies a single, proportional prudential framework across all institutions, including banks and NBFIs. Both regimes aim to safeguard financial stability and mitigate the risks of regulatory arbitrage, but they illustrate different philosophies on how to enable NBFI competition while crafting a risk-sensitive prudential perimeter.

Note: A crore is equal to 10 million (10,000,000) rupees.

It is worth noting that while India and Brazil are cited as illustrative cases of jurisdictions applying scale-based or proportional regulation for NBFIs or small banking entities, the drivers and institutional constraints in their deposit and lending markets reflect the institutional contexts of each market as well as the development of NBFI participation, which may help account for each jurisdiction’s prudential design choices.

Source: 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; Central Bank of Brazil (2025), Financial Stability Regulation, https://www.bcb.gov.br/en/financialstability/regulation; Reserve Bank of India (2023), Master Direction – Reserve Bank of India (Non-Banking Financial Company– Scale Based Regulation) Directions, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550.

3.1.2. Enabling exit

Contestable banking markets require not only the potential for entry, but also the possibility of credible exit (Vives, 2016[4]). Competition ensures that inefficient institutions can lose market share and, if necessary, exit the market. By contrast, inefficient prudential regulation and supervision may prop up underperforming banks, distorting market outcomes and weakening stability (OECD, 2017[3]). Where exit is delayed or obstructed, inefficient banks may continue to absorb resources, depress consumer outcomes, and undermine the incentives and ability for well-managed competitors to expand. Prudential authorities, thus, play a vital role in ensuring that exit is feasible without compromising stability.

Since the global financial crisis, new resolution mechanisms have been introduced across jurisdictions to manage bank failures in an orderly way. These frameworks, ranging from “living wills” to bail-in instruments, are designed to prevent contagion, protect critical functions and reduce the need for taxpayer-funded bailouts. By enabling “safe” exit, they reduce the risk that inefficient or poorly managed institutions remain in the market solely because they are perceived as TBTF.

Importantly, while resolution regimes can be organised differently and take different forms, the Financial Stability Board has published key attributes of effective resolution regimes for financial institutions to inform their effective implementation. The FSB key attributes set out high-level standards for resolution authorities, defining resolution as an administrative process conducted in pursuit of public interest objectives by an authority equipped with the mandate, powers and operational capacity to act effectively. This principle underpins the key attributes, while leaving jurisdictions' flexibility in the institutional design of their resolution frameworks (FSB, 2024[85]).

For example, a living will, also known as a recovery and resolution plan, is a document that large or systemically important financial institutions are required to prepare, setting out how they can be resolved in an orderly way if they fail. In the US, under the Dodd–Frank Act, systemically important financial institutions are required to submit living wills to the Federal Reserve and the Federal Deposit Insurance Corporation. In the EU, the Bank Recovery and Resolution Directive requires banks to prepare recovery and resolution plans in a similar manner (Baudino, Sánchez and Walters, 2021[86]).

A key innovation in resolution regimes is the use of bail-ins. Where bailouts involve the use of public funds to recapitalise failing banks, which may preserve short-term stability but risks encouraging moral hazard and reinforcing the funding advantages of large incumbents, bail-ins allow resolution authorities to impose requirements upfront. Because bail-ins shift the burden of failure away from taxpayers, they may avoid moral hazard and have the potential to help prevent inefficient banks from surviving based on implicit state support (Baudino, Sánchez and Walters, 2021[86]).

From a competition perspective, effective resolution supports contestability. It ensures that unprofitable and failing institutions can be restructured or wound down without permanently increasing concentration. It also lowers the risk of distortive state aid or ad hoc support that insulates incumbents, while rivals must compete without such guarantees. In recent years, prudential and competition authorities have converged on the view that inefficient large institutions simultaneously undermine both financial stability and competition (Cœuré, 2025[15]). Resolution frameworks can therefore be seen as pro-competitive prudential instruments. By making credible the possibility of exit, they mitigate the moral hazard that fuels excessive risk-taking and TBTF distortions. They also reassure markets that losses will be absorbed by shareholders and creditors, rather than by taxpayers, thereby limiting implicit subsidies that would otherwise give large incumbents an undue funding advantage. In turn, smaller or more efficient competitors can expand without facing the uneven playing field created by expectations of state support.

Resolution mechanisms complement competition enforcement. Extraordinary mergers used as resolution tools, for example, when a healthy bank acquires a failing competitor, may create lasting concentration risks if not scrutinised carefully, as discussed in Section ‎3.2.2. Close co-ordination between prudential regulators and competition authorities is therefore helpful: prudential tools can secure stability in the short term, while competition enforcement ensures that banking markets remain contestable in the long term.

3.1.3. Considerations for licensing and capital requirements

The analysis in Section ‎2.1 discusses certain prudential requirements that can play a central role in shaping entry and expansion conditions in retail banking and lending markets. While these requirements are crucial to safeguard stability, they may also unintentionally create competition bottlenecks if they are disproportionate to risks, fail to accommodate new business models, or do not consider the effects on entry and expansion incentives or abilities. This Section highlights certain considerations relevant to their potential proportionality, simplicity and flexibility, which may be relevant to prudential design, particularly where competition is observed to be weak.

First, capital requirements can function both as essential prudential safeguards and as a potential unintended competition bottleneck. When setting capital requirements, authorities might benefit from establishing standards based on international experiences with similar services or entities to ensure that minimum requirements are not set too high or imposed unnecessarily (OECD, 2023[58]).

Moreover, when capital requirements are applied through overly complex or unevenly calibrated methodologies, capital frameworks may unintentionally entrench incumbents’ advantages and disadvantage smaller or newer entrants. For example, under the advanced internal ratings-based approach, banks use their own internal risk models to calculate required capital. This may result in lower effective risk weights for comparable exposures compared to the standardised approach, which is applied to smaller or less complex institutions using supervisor-set parameters. This divergence, driven by differences in modelling sophistication rather than underlying risk, may affect competition where it exists.

The Basel Committee’s emphasis on proportionality allows scope for tailoring requirements without undermining stability. Policymakers can deploy tiered capital regimes that impose stricter standards on systemically important banks while permitting smaller, less risky institutions to operate under simpler, less burdensome rules (BCBS, 2025[59]). Well-calibrated capital frameworks can simultaneously maintain resilience while ensuring that incumbents do not enjoy structural advantages solely due to scale or sophistication. Box 12 discusses experiences across several jurisdictions regarding balancing capital requirements with competition considerations.

Box 12. Calibrating capital requirements

New Zealand

In New Zealand, the Commerce Commission’s 2024 competition report on personal banking services found that regulatory requirements impose substantial fixed costs on market participation, limiting the ability of smaller banks and NBFIs to compete when they lack the scale of major banks. As such, proportionality in regulatory policy settings was identified as key to increasing competition. In particular, capital requirements were identified as one of the prudential regulatory conditions affecting entry and expansion in retail banking services. Prior to the Reserve Bank’s Capital Review in 2022, capital requirements were found to have given major banks a competitive advantage over smaller banks and NBFIs. By 2024, the changes made through the Capital Review had reduced, but not eliminated, this competitive advantage to major banks. The remaining differential was identified as due to differences in internal risk-based modelling outcomes and those under the standardised approaches.

That is, between 2008 and 2022, prudential capital settings allowed the four major banks to hold materially less capital than smaller banks for assets with the same or similar risks. This gave the major banks a competitive advantage while restricting smaller banks' ability to compete. Particularly, as they had less capital available for growth, innovation and investment. The Reserve Bank’s 2019 capital review aimed to implement changes to eliminate those differences following the initial implementation in 2022. However, the smaller banks disputed that those differences had been eliminated after 2022. The Commerce Commission’s report underscored that while these advantages to the incumbents had been reduced, they had not been eliminated.

The Deposit Takers Act 2023, which requires the Reserve Bank to develop new prudential standards and develop a framework for considering proportionality principles and competition, provided an opportunity to recalibrate capital requirements with competition in mind. Indeed, at the time of the Commerce Commission’s 2024 competition report, the Reserve Bank was already consulting on capital requirements for the Deposit Takers Act 2023. The Reserve Bank did not propose changing the “1-in-200-year risk” setting that it had applied in the Capital Review. It did, however, propose lowering the minimum capital requirements for licensed banks and non-bank deposit takers. A Select Committee Inquiry into banking competition and further industry challenge to the “1-in-200-year risk” setting prompted the Reserve Bank to announce a further review of its capital settings, to be completed by the end of 2025.

In this connection, while the Commerce Commission’s competition report on personal banking services did not recommend reviewing the Reserve Bank’s “1-in-200-year risk” settings, as the settings applied across the market. It did, however, recommend that the Reserve Bank broaden its competition assessments and place greater focus on reducing barriers to the entry or expansion of smaller providers, including by refining standardised risk-weightings for capital ratios. In particular, it suggested that the Reserve Bank consider whether standardised risk-weighting could be refined to enable entry and expansion by permitting smaller providers to use more granular standardised risk weightings. This would allow smaller providers to more closely match the risk weightings to the actual risks their loans create and thus potentially reduce the capital they need to hold. The Commerce Commission also made recommendations regarding New Zealand’s deposit guarantee scheme, which are discussed further in Box 14.

Australia

The Australian Competition and Consumer Commission’s 2023 retail deposits inquiry highlighted concerns that capital requirements can provide competitive advantages, similar to those observed in New Zealand. Notably, the inquiry found that capital requirements set using the advanced approach, also known as the internal ratings-based approach, which allows banks to use their internal risk models for calculation, tend to be lower. That is, as opposed to the standardised approach, which applies a common prescribed standard by the prudential supervisor. Major banks generally use the advanced approach rather than the standardised approach. Importantly, however, it also found that the difference in approaches has been mitigated by the new capital framework implemented by the prudential supervisor. This framework increases minimum capital requirements for banks using the advanced approach and reduces capital requirements for banks using the standardised approach.

United Kingdom

The UK’s “Strong and Simple” framework, discussed in Box 8, extends to the capital framework, which aims to significantly simplify the capital requirements for small domestic deposit-takers in the UK, while maintaining their resilience. Namely, by using simpler risk-weighted asset calculations, the regime is designed to foster a more competitive banking sector. In assessing the proposals, the PRA considered that the regime would lead to lower costs for institutions due to simplified compliance with prudential regulation, potentially increasing the incentives for small foreign banks to establish branches in the UK. The simplification regime will take effect in January 2027. Therefore, it will be interesting to monitor whether and to what extent the framework benefits competition in the future

Notes: “1-in-200-year risk” settings refer to capital requirements that each company must hold to withstand 199 adverse risk events out of the next 200 years. Many jurisdictions set their capital requirements to a “1-in-100-year risk,” that is, to withstand 99 adverse risk events over the next 100 years.

The UK’s proposals differ from some Basel standards. However, given that those standards are designed to apply to internationally active banks, whereas small domestic deposit-takers are domestic, the UK continues to align with Basel standards.

Source: Commerce Commission New Zealand (2024), Personal banking services final competition report, https://comcom.govt.nz/__data/assets/pdf_file/0019/362035/Final-report-Personal-banking-services-market-study-20-August-2024-Amended-27-August-2024.pdf; Reserve Bank of New Zealand (2025), 2025 Review of key

capital settings, https://consultations.rbnz.govt.nz/prudential-policy/review-of-key-capital-settings/user_uploads/consultation-paper-review-of-key-capital-settings.pdf; Reserve Bank of New Zealand (2025), 2025 Review of key capital settings, https://www.rbnz.govt.nz/regulation-and-supervision/oversight-of-banks/how-we-regulate-and-supervise-banks/our-policy-work-for-bank-oversight/2025-review-of-key-capital-settings; Australian Competition and Consumer Commission (2023), Retail deposits inquiry - Final report, https://www.accc.gov.au/system/files/Retail-deposits-inquiry-final-report.pdf; 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.

Second, where competition is observed to be weak, a potential consideration to stimulate entry and expansion may be whether to extend the scope of permissible activities. For instance, by allowing NBFIs to accept certain types of less-risky deposits (e.g., term deposits) while subjecting them to prudential safeguards. For example, though exceptional, several jurisdictions permit NBFIs to take term deposits, subject to prudential conditions (see Table 2.1).

The Basel Core Principles for Effective Banking Supervision emphasise that accepting deposits should be limited to institutions that hold a banking license or are subject to supervision as banks (BCBS, 2024[87]). However, the same Core Principles note that when NBFIs are allowed to accept deposits under different regulations than banks, these institutions should be subject to a regulatory framework appropriate to the nature and scale of their operations (BCBS, 2024[87]). Thus, in accordance with the Basel Core Principles, some jurisdictions permit certain non-bank entities to accept term deposits without being subject to the same level of supervision as banks (Ehrentraud et al., 2024[53]).

Particularly, because time deposits have contractual maturities, they may help institutions better manage liquidity outflows and pose lower risks than demand deposits. Where such activities are permitted to NBFIs, competitive neutrality principles can help inform the calibration of accompanying prudential obligations (e.g., capital requirements or deposit-guarantee schemes).1 Design choices, therefore, involve a balancing exercise: opening limited deposit-taking may improve contestability and consumer choice, while proportionate safeguards, such as risk-based capital requirements, large exposure limits, creditworthiness assessments, fit and proper management assessments and supervisory reporting, can help preserve stability (Ehrentraud et al., 2024[53]). A potential benefit of allowing term deposit-taking by NBFIs, which are subject to appropriate oversight, is that it provides pathways to expansion and alternative entry routes, reducing dependence on bank partnerships. Box 13 provides an example from Mexico.

Box 13. Mexico’s NBFI tiered licensing structure

NBFIs in Mexico have benefited from a tiered licensing framework that aligns regulatory requirements with business models and risk profiles. For instance, NBFIs may extend credit without a license, provided they do not take deposits. To mobilise deposits, NBFIs can apply for a Sociedad Financiera Popular (SOFIPO) licence, which allows them to accept retail deposits while imposing prudential obligations, including participation in a deposit guarantee scheme. This structure enables proportionate supervision and entry into deposit-taking without requiring a full banking charter. Although SOFIPO licenses were introduced primarily to promote financial inclusion, they have also enhanced competition by lowering barriers to entry and facilitating a gradual path toward full authorisation.

Several market participants have used this framework to gradually expand their activities.

Nubank, initially launched in Mexico in 2020 as an unregulated lender, entered the market with a no-fee credit card product. As its lending portfolio grew, it expanded into payments and later deposits under a Sociedad Financiera Popular licence obtained in 2022. The SOFIPO framework enabled Nubank to mobilise deposits while meeting proportionate prudential requirements and deposit insurance, maintaining consumer confidence without the regulatory burden of a full bank charter. In April 2025, Nubank obtained a full banking licence, reflecting both its growth trajectory and the supervisory pathway designed to align prudential obligations with institutional scale and complexity.

Klar, another prominent FinTech lender, followed a similar incremental licensing path. Founded in 2019, Klar began by offering unsecured consumer credit through partnerships with licensed financial institutions. Over time, Klar obtained its own Sociedad Financiera Popular licence, enabling it to intermediate deposits directly and expand into digital savings products. The firm’s growth trajectory demonstrates how proportional regulation can facilitate the scaling of domestic entrants, allowing them to compete with incumbents while maintaining prudential safeguards. Klar’s 2024 announcement of profitability and plans to pursue a full banking licence underscores the role of the SOFIPO model as a stepping stone from non-bank intermediation to fully regulated banking.

Stori, launched in 2018, initially operated under the non-bank credit provider model, offering credit cards to previously unbanked consumers. After securing significant investment, Stori obtained a SOFIPO licence in 2023, allowing it to mobilise deposits and diversify its funding base. Like Klar, Stori’s transition from pure lending to deposit intermediation reflects Mexico’s licensing framework's ability to accommodate FinTech evolution within a prudentially proportionate regime. The move also aligns with financial inclusion objectives, as Stori serves a large base of first-time borrowers and depositors who were previously excluded from formal credit markets.

Taken together, these cases highlight how Mexico’s graduated prudential perimeter supports entry and scaling while maintaining stability. By providing multiple licensing tiers (from unlicensed credit provision to SOFIPO status and, ultimately, full bank authorisation), the framework allows supervision to evolve in line with institutional growth and systemic importance. The entry of digital lenders such as Nubank, Klar and Stori has broadened access to credit and contributed to lower borrowing costs in certain market segments. According to the Bank of Mexico, average credit card interest rates offered by new entrants are several percentage points lower than those of traditional banks, while savings accounts introduced by SOFIPOs have increased average yields offered to small depositors.

Source: Cofece (2024), Study of Competition and Free Market Access in Digital Financial Services, https://www.cofece.mx/wp-content/uploads/2024/11/EE24-F_fintech-ENG_1DEAI-1-1.pdf; 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/; Mexican Government (2016), Sociedades Financieras Populares, Sociedades Financieras Comunitarias, https://www.gob.mx/cnbv/acciones-y-programas/sociedades-financieras-populares-sociedades-financieras-comunitarias; Mexico Financial License (2025), Mexico Licensing Guide 2025, https://mexicofinanciallicense.com/wp-content/uploads/2025/08/Mexico-Licensing-Guide-2025.pdf; Klar (2025), Klar Aims for Bank License Amid Growing Financial Inclusion, https://mex.news.o-abroad.com/~/economy/169751-en-klar-aims-for-bank-license-amid-growing-financial-inclusion.html; Bloomberg (2025), Fintech Klar catches up on race to bank status with purchase, https://www.bloomberg.com/news/articles/2025-09-05/fintech-klar-catches-up-on-race-to-bank-license-with-purchase-of-banorte-s-bineo; Newswire (2023), Stori, the Mexican Unicorn, obtains approval to acquire the Sofipo MasCaja, a licensed deposit entity, to expand its product offering, https://www.prnewswire.com/news-releases/stori-the-mexican-unicorn-obtains-approval-to-acquire-the-sofipo-mascaja-a-licensed-deposit-entity-to-expand-its-product-offering-301921035.html; Finextra (2024), Mexican fintech Stori raises $212 million, https://www.finextra.com/newsarticle/44557/mexican-fintech-stori-raises-212-million; Banco de Mexico (2024), Financial Stability Report, https://www.banxico.org.mx/publications-and-press/financial-system-reports/%7B1DDCC744-D56B-0BA1-584B-52DAADCA217E%7D.pdf.

Relatedly, deposit guarantee schemes may consider avoiding one-size-fits-all funding models that may impose disproportionate burdens on small challengers. That is, they may benefit from preserving incentives for prudential risk management while assessing contributions to each institution’s size, complexity, or risk profile. Moreover, perimeter choices generally may benefit from considering their impact across multiple policy spheres, including competition. As further discussed in Section ‎3.3, competition assessments of regulations can be a helpful tool when undertaking this balancing act.2 Box 14 provides an example from New Zealand.

Box 14. New Zealand’s deposit guarantee scheme

New Zealand is an example of balancing prudential and competition considerations in assessing whether the regulatory perimeter applicable to NBFIs should be extended to include deposit insurance. New Zealand allows NBFIs to hold term deposits. Under the Non-Bank Deposit Takers Act 2013, NBFIs were subject to a prudential framework. However, in the context of the Deposit Takers Act 2023, which aims to modernise New Zealand’s regulatory framework for both banks and NBFIs, the government assessed whether (i) to extend deposit insurance to NBFI deposit-takers, or to exclude them and (ii) in what proportion levies should be imposed.

In assessing whether to bring NBFIs into the deposit insurance fold, the government conducted a regulatory impact assessment in 2024 on the proposed depositor compensation scheme (DCS) regulations, which considered the potential impact on prudential and competition objectives. In this assessment, the government found that deposit insurance would change the risk profile of most risk-takers, benefiting prudential objectives. At the same time, it asserted that it would “place pressure on deposit rates and increase competition in the deposit-taking market, by increasing the sensitivity depositors have to the interest rates they are offered (increase in price elasticity).”

Notably, however, the Commerce Commission’s competition report on personal banking services, also from 2024, recommended that the Reserve Bank “broaden its competition assessment and place greater focus on reducing barriers to entry or expansion for smaller providers.” It also advised the government to “err on the side of not adding to the burden on small deposit takers until more is known on the impacts of introducing the DCS, including relative to costs different deposit takers will impose on the scheme.”

Regarding how levies should be imposed, major banks argued that levies should be risk-based to ensure that providers most likely to fail pay more, thereby avoiding unjustified risk-taking and cross-subsidisation of riskier providers. Smaller banks and NBFIs, in turn, argued that a fully risk-based levy would be potentially unaffordable for some of them and potentially place a disproportionately higher burden on them to meet. The Commerce Commission recommended an initial flat-rate levy until more is known of the impacts of introducing the DCS.

Ultimately, deposit-taking NBFIs were required to participate in deposit guarantee schemes applicable to them. The DCS came into effect in July 2025, fully funded by industry participant levies. The levies imposed on institutions for the safety net are based on each institution's size and risk assessment. Credit unions and building societies will, however, pay a flat-based levy, meaning their levy will be set in proportion to their estimated covered deposits. In 2028, when the Deposit Takers Act is fully in force, the risk-based levy will apply to all deposit takers. The Finance Ministry underscored that “[t]he levy will be based on total deposits covered by the scheme, so the four largest banks will pay about three quarters of the total.” Additional considerations include, for example, the likelihood of needing to draw on the deposit guarantee payout and the impact of the levy on entity soundness.

Moreover, in response to the Commerce Commission’s recommendations, the Finance Minister has stated that, while the DCS is expected to improve competition in the sector, the scheme's impact will be monitored. As of this writing, the DCS’s effects on consumer behaviours and competition for deposits, as well as whether the DCS has enabled smaller deposit-takers to attract more deposits than previously, remain to be seen. Thus, it will remain important to monitor the perimeter choice and the proportionality of the levies and their impact on competition going forward.

Note: In New Zealand, high bank profitability and concentration (compared to international comparisons) identified a lack of competition in the banking industry and led to multiple reviews of the sector by relevant agencies, including the Commerce Commission, at the direction of the Government, to revamp competition.

Source: Reserve Bank of New Zealand (2024) Regulatory Impact Statement: Depositor Compensation Scheme Regulation, https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/proactive-releases/2024/regulatory-impact-statement-dcs-regulations-2024.pdf; Reserve Bank of New Zealand (2024), Depositor Compensation Scheme - Transitional Advice, https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/about/our-legislation/depositor-compensation-scheme-transitional-advice-rbnz-6118.pdf; Reserve Bank of New Zealand (2024), Depositor Compensation Scheme levy approach agreed, https://www.rbnz.govt.nz/regulation-and-supervision/deposit-takers-act/dcs-levy-approach-agreed; Reserve Bank of New Zealand (2025), Reserve Bank of New Zealand (2023), Overview of the Deposit Takers Act, https://www.rbnz.govt.nz/regulation-and-supervision/deposit-takers-act/overview-dta; Commerce Commission New Zealand (2024), Personal banking services final competition report, https://comcom.govt.nz/__data/assets/pdf_file/0019/362035/Final-report-Personal-banking-services-market-study-20-August-2024-Amended-27-August-2024.pdf; Savage, K (2024), A risk-based funding model for the new depositor compensation scheme will see the four largest banks bear most of the cost of the safety net with smaller entities subject initially to a flat fee, Good Returns, https://www.goodreturns.co.nz/article/976523786/govt-takes-risk-based-approach-to-deposit-guarantee-scheme.html; Reserve Bank of New Zealand (2025), Depositor Compensation Scheme now in effect; https://www.rbnz.govt.nz/hub/news/2025/07/depositor-compensation-scheme-now-in-effect; 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; Dennery, C. (2024), Revamping competition in New Zealand, OECD Economics Department Working Papers, No. 1817, OECD Publishing, Paris, https://doi.org/10.1787/8bbbad04-en.

Third, certain jurisdictions have also promoted competition by adopting a more flexible approach to licensing and supervisory requirements for digital business models based on risk. As discussed in Section ‎2.1.1, licensing regimes can create barriers for digital or cross-border entrants when requirements, such as local presence obligations, particularly physical branch requirements, are not well aligned with technology-driven or cross-border business models. In response, some jurisdictions have recalibrated their frameworks to balance innovation, prudential oversight and market contestability. Box 15 discusses Hong Kong's (China) experience with digital-only bank licenses.

Box 15. Digital-only bank licenses in Hong Kong (China)

In addition to enabling NBFIs to hold term deposits, as illustrated in Table 2.1, the government has facilitated the introduction of digital banks by creating digital-only bank licenses and releasing accompanying Guidance in 2018. These licenses cater to the unique characteristics of digital banks by adapting supervisory requirements to their business models, using a risk-based, technology-neutral approach. For example, digital-only licenses do not include local presence obligations such as a physical branch or minimum in-country staffing, but instead require local incorporation, governance and operational oversight. In its 2024 review of virtual banks, the Monetary Authority concluded that the development of virtual banking positively impacted competition in the overall banking sector, with incumbent banks responding to competitive pressure from new entrants.

Note: Importantly, in the context of the 2024 review of banks, the Monetary Authority expressed concern that not all eight of the current digital-only banks are yet profitable. The authority is thus hesitant toward granting more digital-only licenses. In this context, as the market evolves, it may be worthwhile to consider the positive effects of perceived or actual potential competition enabled by the possibility of market entry. Market participants’ innovative incentives may weaken if there is no perception of an ongoing threat from new challengers. Moreover, alternatives to address profitability and thus the resilience of the sector may include enabling exit mechanisms for less efficient competitors.

Source: HKMA (2025), Digital Banks, https://www.hkma.gov.hk/eng/key-functions/banking/banking-regulatory-and-supervisory-regime/digital-banks/; HKMA (2024), Report on the review of virtual banks, https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2024/20240806e3a1.pdf.

3.2. Examples of how competition may support prudential objectives

3.2.1. Interest rates

Multiple recent market studies across jurisdictions underscore that concentrated market structures, combined with the structural barriers present in deposit and lending markets, are associated with slower, weaker and more selective pass-through of savings and lending rates to consumers.3 Legislators have also expressed concerns about this weak pass-through. In the UK, for example, recent parliamentary debates noted that “[h]igher interest rates have not been passed on to savers; they have been hoarded by the banks, creating a windfall for them of many billions for doing nothing productive” (UK Parliament, 2023[88]).

This perception has led to the adoption of windfall taxes on banks in many jurisdictions. Such taxes may have fiscal and redistributive objectives, such as raising funds to invest in public services.4 Competition enforcement and competition-enabling policy tools, under appropriate prudential safeguards, offer an alternative or complementary approach that directly targets the lack of competitive pressure on incumbent banks, which leads to weak pass-through.

For example, the introduction of competition-enabling tools can address structural and behavioural frictions that weaken pass-through. Market studies in Australia, Belgium and New Zealand converge on the importance of improving transparency, comparability and switching.5 For instance, the ACCC recommended reforms to improve consumer awareness of deposit rates and to facilitate easier comparison across banks (ACCC, 2023[40]). The Belgian Competition Authority called for simplifying or removing the dual-rate system of base and loyalty bonuses, which makes savings products less transparent and less comparable (BCA, 2023[21]). New Zealand’s Commerce Commission placed particular emphasis on implementing open banking and strengthening the role of challenger providers (ComCom, 2024[41]). Each of these recommendations recognises that by lowering switching costs and reducing information asymmetries, regulators can spur greater customer mobility and competitive pressure, ultimately increasing the responsiveness of banks to interest rate changes.

Historical international experiences also suggest that enabling competition can be a more durable solution than fiscal interventions such as windfall taxes (Dell’Ariccia, 2001[89]; Van Leuvensteijn et al., 2008[50]).6 Initiatives that promote entry, empower challengers and facilitate customer switching not only enhance pass-through in deposit markets but also improve access to credit. Improved access to credit may not only lower borrowing costs but also reduce borrower defaults and system risk (OECD, 2017[10]).

In other words, strengthening interest-rate pass-through can also advance prudential objectives by improving the transmission of monetary policy and the quality of bank loan portfolios. As discussed in Section ‎1.3, one of the channels through which monetary policy affects the real economy is the credit channel, with monetary easing influencing the cost and availability of bank credit (Byrne and Kelly, 2017[49]). When declines in policy rates are only partially reflected in lending rates, borrowing costs remain elevated relative to funding costs, heightening repayment pressures and credit risk, particularly among highly leveraged households and SMEs. Persistently high lending spreads can erode loan performance and weaken banks’ balance-sheet resilience. By contrast, more contestable and transparent lending markets may foster quicker and more even rate adjustment, aligning borrowing costs more closely with monetary policy conditions and mitigating the build-up of credit risk (Byrne and Kelly, 2017[49]; Van Leuvensteijn et al., 2008[50]). At the same time, enhanced competition can compress interest margins and incentivise risk-taking by banks. Thus, adequate prudential oversight, as a complement to competition, remains important to prevent excessive risk-taking (Vives, 2016[4]; Byrne and Kelly, 2017[49]; Van Leuvensteijn et al., 2008[50]). Under such safeguards, competition can reinforce effective transmission while supporting overall financial stability.

3.2.2. Merger enforcement and competitive neutrality

As discussed in Section ‎2.2, merger control is central to ensuring that long-lasting anticompetitive effects from concentration do not materialise. By curbing excessive concentration and preserving diversity in ownership and business models, merger enforcement can mitigate risk and strengthen the resilience of the financial system. In this way, effective merger control can complement prudential objectives by promoting a more diversified and contestable banking sector. Competitive and well-diversified financial systems are likely to be less prone to systemic risk and better able to absorb shocks (OECD, 2017[3]; 2011[2]). Merger control, together with prudential tools such as resolution regimes, can therefore enhance stability. Sustained co-ordination between prudential regulators and competition authorities helps align short-term crisis management with long-term market resilience. Relaxing merger control on stability grounds, by contrast, can entrench incumbents, distort incentives and magnify TBTF risks.

Experience from past crises shows that stability considerations have at times outweighed competition concerns, even where subsequent evidence indicated that consolidation weakened long-term performance and innovation (Vickers, 2010[90]; OECD, 2011[2]; Philippon, 2017[52]). The failing-firm defence, recognised in most jurisdictions by competition authorities as a narrowly drawn exception, applies to the review of mergers where the risk of a failing firm exiting the market is present. Where used cautiously, this mechanism can balance stability and competition, but over-reliance on it risks normalising concentration. In addition, prudential resolution instruments, such as bail-ins, living-wills and recovery planning, provide credible alternatives to anti-competitive combinations, safeguarding financial stability without undermining market entry and rivalry.

Moreover, maintaining competitive neutrality in the treatment of market participants and avoiding preferential support or implicit guarantees that encourage risk-taking reinforces market discipline and reduces the consequences of moral hazard. A level playing field helps ensure that financial institutions compete on the basis of efficiency and sound risk management rather than implicit support. Competitive neutrality, therefore, can contribute to stable financial intermediation by discouraging excessive risk-taking and fostering trust in the system as a whole. In sum, ensuring neutrality in public support frameworks can provide an important complement to prudential and competition objectives.

Box 16 discusses lessons from Korea, underscoring why the benefits of competition should not be overlooked in the context of financial stability.

Box 16. Korea: competition and financial stability

In Korea, both weak competition enforcement and prudential oversight have been found to have contributed to the 1997 financial crisis. Limited enforcement, combined with weak corporate governance and prudential oversight, allowed conglomerates to expand through excessive leverage and inefficient investment, distorting incentives and masking losses until the system’s eventual collapse.

Before the crisis, during earlier periods of economic stress, various crisis-motivated cartels were permitted under Korean law. The Price Stabilisation and Fair Trade Act of 1975 aimed primarily to control inflation and stabilise markets by co-ordinating prices and output across industries. As a result, competition considerations were subordinated to short-term stability objectives, with numerous government-approved “rationalisation” or “depression” cartels operating during that period.

Two key lessons emerged from the 1997 financial crisis that remain relevant to current assessments on the balance between stability and competition. First, during crises, government agencies may overlook the beneficial effects of competition, prioritising short-term stabilisation over longer-term market resilience. The Korean experience has since demonstrated that vigorous competition enforcement, even in times of economic stress, can help ensure that emergency measures do not unnecessarily distort market structure or entrench incumbents.

Second, the Korean authorities have also emphasised that, in line with principles of competitive neutrality, even in crises, the least anti-competitive solutions should always be sought. In sum, as exhibited by Korea since the 1997 crisis, promoting competition can restore market confidence and lay the foundations for sustainable economic recovery. In the wake of the global financial crisis and more recently, the Korean government reaffirmed this approach, underscoring the importance of competition enforcement in the recovery process.

Source: OECD (2011), Competition Issues in the Financial Sector: Key Findings, OECD Publishing, Paris, https://doi.org/10.1787/37dd5552-en; Lee, W, KFTC vows to tackle cartels, unfair trade, amid political, economic uncertainty, https://www.mlex.com/mlex/articles/2280994/kftc-vows-to-tackle-cartels-unfair-trade-amid-political-economic-uncertainty; OECD (2021), Regulatory quality and competition policy in Korea, https://www.oecd.org/en/publications/korean-focus-areas_f91f3b75-en/regulatory-quality-and-competition-policy-in-korea_e5b4137d-en.html; Coe, T; Kim, S (2002), What Have We Learned from the Korean Economic Adjustment Program?, https://www.elibrary.imf.org/display/book/9781589060685/C03.xml; OECD (2021), Korea and the OECD: 25 years and beyond, https://www.oecd.org/content/dam/oecd/en/about/projects/edu/education-policy-outlook/Korea%20and%20the%20OECD.pdf; Lee, H (2015), Development of Competition Laws in Korea, https://www.eria.org/ERIA-DP-2015-78.pdf; 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.

3.3. Considerations for enhanced co-operation

Prudential and competition authorities pursue distinct objectives; however, their policy choices intersect in practice. Decisions on licensing, capital, resolution, and supervision inevitably shape market structure, entry conditions, and incentives, just as competition outcomes can influence prudential resilience. Ensuring that these interactions remain neutral or mutually reinforcing benefits from ongoing co-operation. The following discussion highlights areas where co-ordination may be particularly valuable, as well as tools that may help align stability and competition objectives.

One area where co-operation can be especially critical is in enabling the orderly exit of inefficient institutions through resolution mechanisms. Such frameworks can help avoid crisis-driven mergers or bailouts. Rather than relying on consolidation, state support, or intervention to preserve short-term stability, well-designed resolution regimes can support better long-term outcomes by preventing further concentration, entrenchment, or the reinforcement of TBTF structures. Absent co-ordination, crisis measures risk creating lasting market distortions that are costly to unwind. Structured dialogue, however, allows prudential authorities to shape resolution frameworks in advance, benefiting from competition perspectives. This enables orderly exits without contagion and aligns stability and competition objectives.

Similarly, competition authorities can help guide proportionate considerations, preserving a level playing field for smaller entrants while maintaining prudential safeguards. Particularly, systematic competition impact assessments of new and existing laws or regulations, using instruments such as the OECD Competition Assessment Recommendation and Toolkit, can help operationalise complementarities and co-operation by identifying and amending rules that unintentionally or unnecessarily restrict competition and balance prudential goals (OECD, 2019[91]). Additionally, the OECD Recommendation on Competitive Neutrality and Toolkit provides competition authorities and other public officials with tools to identify government policies that may distort the level playing field and to develop alternatives that minimise such distortions (OECD, 2024[81]). Moreover, proportionality mechanisms that scale prudential requirements to firms’ complexity or risk profiles, preventing disproportionate burdens on smaller providers, along with the simplification of rules, may also be helpful guiding principles for balancing. This can help ensure that obligations are clear for smaller players to comply with and for supervisors to enforce.7

Another area for co-operation across authorities lies in joint market monitoring and forward-looking assessments, including through joint committees or frequent exchanges. In line with, or as part of, competition impact assessments, they can help identify unintended anticompetitive effects of prudential measures. Regular market studies and horizon scanning can also help identify current and potential future vulnerabilities and trade-offs. For example, in Israel, an Interministerial Committee was created this year to advance banking competition. The committee includes participation from the Competition Authority, the Central Bank and the Finance Ministry, amongst others. Their focus will be on removing restrictions to competition and lowering entry barriers for new participants, including NBFIs (Bank of Israel, 2025[92]).

Furthermore, regulatory sandboxes allow new entrants to test services under supervision, giving regulators early insights into risks while lowering entry barriers for smaller or non-traditional providers (World Bank, 2020[93]). For example, in Spain, following the CNMC’s market study on the impact of new financial technologies and its recommendation to create a regulatory sandbox to support innovation without heavy entry barriers, the Spanish Parliament adopted the sandbox proposal (CNMC, 2018[94]) (Government of Spain, 2020[95]). Cross-border sandbox initiatives can further reduce duplicative compliance costs, prevent regulatory arbitrage and promote consistent standards across jurisdictions, which may help fuel new entry and enhance competition. By providing a controlled space for experimentation, sandboxes can help prudential and competition authorities, including across jurisdictions, calibrate proportionate rules while supporting innovation and contestability (World Bank, 2020[93]).

Co-operation can range from informal exchanges to more formalised arrangements with defined procedures for consultation. Examples from practice show that institutionalised co-operation is valuable. In Portugal, the competition authority and the Bank of Portugal have built mechanisms for sustained collaboration across advocacy, supervision and enforcement. This allows each authority to act within its mandate while reinforcing the other’s objectives (OECD, 2025[96]). In the UK, concurrent powers between financial and competition regulators, alongside forums such as the Digital Regulation Co-operation Forum, have fostered joint assessments and shared regulatory messaging (OECD, 2025[97]). Yet, co-operation does not necessarily need to be formalised. What matters is that regular communication ensures both perspectives are reflected in decision-making. Whether through memoranda of understanding or informal dialogue, clear mandates and sustained engagement can help avoid tensions, reduce gaps and ensure coherent enforcement.

The cross-border dimension to the provision of financial services reinforces the benefits of international co-operation. Openness to foreign bank entry, with fewer restrictions on activities subject to strong safeguards and oversight, or access to licensing without physical brick-and-mortar presence requirements, while ensuring appropriate supervision and risk management, can help make banking markets more competitive and resilient. Entry or expansion barriers, by contrast, reduce contestability and may risk fragmenting markets along national lines. Divergent prudential regimes also create opportunities for regulatory arbitrage, as firms may exploit gaps between jurisdictions. In the EU, for example and as underlined in the Draghi Report, completing the Banking Union would help overcome fragmentation, allow genuine cross-border risk-sharing (Draghi, 2024[98]). At a global level, stronger international co-ordination between prudential and competition authorities may help ensure that cross-border banks and NBFIs operate under consistent standards that protect stability and enable a level playing field.

The broader implication is that prudential regulation and competition enforcement may, at times, be complementary and where they conflict, there is an opportunity for balancing. Prudential rules underpin the trust that makes competition meaningful, while competition amplifies the impact of prudential rules by keeping markets efficient, innovative and reducing reliance on a few systemically important firms (Vives, 2016[4]). Enhanced co-operation enables both sets of objectives to be effectively pursued in tandem: curbing systemic risks, supporting contestability, innovation and fostering efficiency, while improving consumer outcomes. In practice, this likely requires early dialogue, proportionate rule design and institutional and cross-border co-ordination.

Notes

← 1.  As highlighted by the OECD in its Competitive Neutrality Toolkit, in some instances, it may be good practice to treat incumbents and smaller competitors or potential competitors differently to promote contestability. By imposing asymmetric obligations on specific firms, the playing field may be levelled by promoting entry and preventing smaller competitors from being excluded from the market (OECD, 2024[81]). As underscored by the OECD’s Recommendation on Competitive Neutrality, a key element to ensuring regulations remain pro-competitive includes continuous monitoring, including evaluating regulations through competition assessments and the ability to redesign, restructure, or withdraw a policy as needed.

← 2.  The 2019 OECD Recommendation on Competition Assessment and Toolkit can help governments improve their laws and regulations and promote more competition in their economies, leading to lower prices, greater choice and higher quality of goods and services. The Toolkit helps identify laws and regulations that can restrict competition and supports governments in looking for alternative ways to achieve policy objectives (OECD, 2019[91]).

← 3.  In Australia, the ACCC found that incumbent banks were slower and more selective in raising deposit rates than smaller rivals, with pass-through particularly limited for customers in basic, high-volume products (ACCC, 2023[40]). The Belgian Competition Authority similarly concluded that incumbent banks’ dominance contributed to significantly weaker savings rate pass-through than in neighbouring countries, with complex dual-rate structures further reducing comparability and competitive pressure (BCA, 2023[21]). New Zealand’s Commerce Commission highlighted a “stable oligopoly” of four major banks and identified a lack of competition as a factor reducing incentives to improve deposit offerings (ComCom, 2024[41]). The UK FCA has likewise pointed to structural concentration and low switching rates as drivers of limited pass-through in retail banking markets (FCA, 2023[42]).

← 4.  This paper does not take a position for or against these measures. However, it is important to note that they do not address the underlying structural drivers of the pass-through problem itself. Since the financial intermediation role of banks is to direct savings into profitable investment projects, the margin between the interest rate banks pay for their funds (including deposits and other forms of borrowing) and the interest rate charged for loans can be interpreted as a measure of competition and efficiency (Demirgüç-Kunt and Huizinga, 1999[109]). Thus, the most suitable solution to address pass-through issues may be to increase competition. Lower interest margins can result from lower rents or a more immediate passing on of cost reductions to customers, which indicates more intense competition among banks. From a prudential perspective, narrower margins achieved through competitive pressure may enhance efficiency and monetary policy transmission, while persistently wide margins may signal weak competition, excessive rents and potential prudential concerns.

← 5.  Further competition-enabling recommendations are included in the market studies. For example, the Belgian authority makes multiple recommendations to stimulate competition in the retail banking market, without jeopardising its stability. These include considering product separation and a principled ban on tied sales and other bundled offers, subject to certain exceptions that benefit customers’ interests, with the aim of enhancing contestability and reducing customer immobility (BCA, 2023[21]). Similarly, the ACCC’s inquiry into retail deposits noted that strategic product design by large incumbents, including the setting of discretionary conditions on high-interest products, could be scrutinised where such design features restrict effective competition (ACCC, 2023[40]). By addressing such practices, competition enforcement can help ensure that competitive pressure drives improvements in the rates offered to depositors, thereby supporting the transmission of monetary policy.

← 6.  By contrast, windfall taxes respond to the distributional consequences of weak pass-through without necessarily altering the incentives or conduct of banks. Strengthening competition enforcement and adopting competition-enabling policy tools, such as open banking, centralised comparison platforms and restrictions on exclusionary product design, may thus contribute to alleviating concerns about monetary policy effectiveness. In this way, competition policy and enforcement can complement prudential regulation and broader macroeconomic objectives, ensuring that interest rate changes are more effectively transmitted across the financial system and to consumers.

← 7.  Simpler rules can improve transparency and supervisory effectiveness, while lowering compliance costs for smaller and less complex institutions, thereby supporting entry and a level playing field (Cannata and Serafini, 2025[108]).