BANKING. INTERNET LOANS: FASTER AND SAFER: The Two-Stage Globalization of Regulatory Competition

product’s marketContemporary theories of industrial organization seek to explain how a product’s market structure evolves through time to permit efficient firms to discipline or displace relatively less-efficient competitors. The force of these theories is particularly easy to grasp when we focus on hypothetical markets that meet a set of ideal conditions that Baumol, Panzar, and Willig (1986) call “perfect contestability.”

A market is perfectly contestable when entry and exit costs are each zero and incumbent firms exit quickly whenever they find themselves faced with negative profits. In perfectly contestable markets, low-cost firms readily displace high-cost firms and incumbent competitors are prevented from setting monopoly prices by the threat of hit-and-run entry by other equally-efficient firms.

This paper deploys an imperfectly contestable-markets perspective on market-structure change to discern two stages of financial deregulation in Asia and elsewhere. The first stage takes the form of de facto deregulation of entry barriers by market forces. The second stage consist of subsequent de jure ratification and regularization of market developments by the financial regulatory establishment.

During the last 30 years, technological change has made banking and other formal and informal financial markets increasingly more contestable. More and more new establishments open daily and try to provide thier customers with better conditions. in such a competition they forget about the main goal namely to satisfy the customers needs. For example the Internet banking is very popular nowadays and namely is ready to approve the loan.
This brought clients that were regulated by regulators from other countries and from other domestic jurisdictions into increasing competition with one another. The second stage of deregulation followed when and as this mutual invasion of traditional markets put increasing pressure on specialized incumbent regulators to re-examine the burdensomeness of their rules.

First Stage: De Facto Market Deregulation

For several decades and particularly in corporate banking markets around the world, technological change steadily lowered entry costs for foreign and non-traditional competitors. Initially, the more-De Facto Market Deregulationcautious foreign and nontraditional financial firms booked their market-share incursions in innovative ways. They did banking business by making creative use of substitute products, substitute organizational forms, and substitute offshore locations. In most countries, a new entrant’s ability to use differently regulated substitute opportunities was facilitated by longstanding and burdensome restrictions on how traditional deposit institutions could compete domestically.

Second Stage: De Jure Ratification and Reregularization of Market-Driven Deregulation

The second stage occurred when regulators officially acquiesced in this innovative entry by foreign and non-traditional firms and went on to relax many of the restraints under which their traditional clients had previously operated. As banks’ aggregate market share shrank, they pressed politically for their traditional domestic regulators to relax or jettison their most burdensome regulations. At the same time, foreign and non-traditional entrants into a country’s banking markets pressed authorities to offer them charters that could regularize and reduce the circumvention costs occasioned by their creative de facto incursion into that country’s banking markets. In Asia and elsewhere, authorities’ positive response to these political pressures during the 1980s and 1990s has been labeled financial deregulation. All our actions are regulated by the amount of wages. Money allows us to do something as well as to prevent us from acting. You shouldn’t place your dreams in a cold storage you may take a loan, a speed one to realize all your thoughts.

Around the world, governmental and market deregulation has been greater for wholesale and private banking markets than for retail ones. Moreover, the word deregulation is in any case a misnomer for the detailed pattern of second-stage or “regularizing” regulatory adjustments that followed. In many countries a deregulation of entry costs was combined with lags in imposing adequate prudential supervision that amounted to a far-from-deregulatory accentuation of regulatory barriers to exit for insolvent domestic deposit-institution competitors. Using the contestable-markets paradigm of market-structure change makes it clear that banking deregulation in most countries initially occurred only on the entry side and that subsequent regulatory efforts to resist the exit of at least some classes of traditional domestic competitors foreshortened some of the increased contestability in specific banking markets that entry relaxation would otherwise have produced. Banking regulators have lowered regulatory entry costs almost to zero, but in adopting or strengthening domestic guarantee systems, many countries turned around and raised incumbent exit barriers thereafter.

It is important to understand that incumbent banks’ ability and willingness to run negative profits are a form of exit costs. Exit costs limit a new entrant’s ability to penetrate a market. By resisting the exit of its unprofitable clients, a regulator can prevent efficient competitors from being able to earn enough profits to sustain permanent entry. As foreign and nontraditional financial-services competitors have come to appreciate the importance of regulator-financed exit costs in many countries, they have slowed their rate of entry into new banking markets and even reversed some of their past entry.

Tags: , , ,