Financial Crisis, Regulation and Competition: The Romanian Banking Experience

Abstract

By the early 1970s, competition in the banking system was limited. Reduced competition in the banking system was due to regulations adopted by many countries after the financial crisis of the 1930s. At that time, authorities believed that the high risks which banks have assumed, in a fierce competition context, led to destabilization of the financial system. After the 1980s, deregulation, financial liberalization and technological change were important factors that have led to increased competition in the banking sector. Therefore, an important issue for regulators and supervisors is the relationship between competition in the banking system and financial stability. The specialty literature, both theoretical and empirical, has not reached a consensus on the effects of competition on financial stability. This problem became more acute under the global financial crisis. Against this background, the paper analyses the role of competition in the Romanian banking system in the context of the global crisis. The paper is structured as follows: the first section reviews the arguments supporting that increased competition in banking system leads to improved financial stability; the counterarguments are mentioned later. The role of regulations in managing the competition in banking system is also emphasised. The last section analyzes developments on competition and stability in the Romanian banking system.