Competition and scope of activities in financial services

This article analyzes the costs and benefits of different degrees of compet ition and different configurations of permissible activities in the financi al sector and discusses the related implications for regulation and supervi sion. Theory and experience demonstrate the importance of competition for e fficiency and confirm that a competitive environment requires a contestable system-meaning one that is open to competition-but not necessarily a large number of institutions. A competitive banking system can improve the distr ibution of consumer credit, enhance the corporate sector's access to financ ing, and mitigate the risks of financial crises. In an open market, in whic h services and products are provided in response to market signals, financi al institutions respond by offering a wider scope of financial services. Th e optimal institutional design for supervisory functions is less obvious.