Competition in Banking: Achieving the Right Balance

Alfred Broaddus

Speech from Federal Reserve Bank of Richmond

Abstract: It is a pleasure to be with you this morning. The theme of this session is “How Banks Compete.” I want to develop a variation on this theme and consider how the intensity of competition in banking has increased over the years, and some of the challenges this change presents. In the 33 years I have worked at the Richmond Fed banking has changed immensely. A salient feature of this change — perhaps the single most important feature — has been expanded competition. Today Chicago banks, for example, can own branches in any state, pay market-determined interest rates on deposits and charge market-determined rates on loans, and offer a continuum of financial products to their customers. Twenty years ago all of these powers were restricted. As regulatory reforms have eased the constraints that previously held banking competition in check, the industry has become more efficient and consumers now enjoy far wider choices. While such regulatory changes are certainly welcome, they have made the job of the bank supervisor more difficult. Today’s marketplace demands that banks take advantage of every profit opportunity. This is appropriate, and drives much banking innovation and efforts to improve operational efficiency. Nonetheless, given the presence of the financial safety net, competitive pressures also may induce banks to act in ways that distort markets, degrade the safety and soundness of the banking system, and put taxpayers at risk. Actions taken by savings and loan companies during the 1980s provide the most notorious example of such behavior. The obvious implication is that bank supervisors — aware of the greater incentive to take advantage of the safety net — must be far more diligent now than at any time in the past.

Keywords: monetary policy; Financial Institutions and Regulation (search for similar items in EconPapers)
Date: 2004-05-06
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