Paris: Stricter financial market regulation need not harm competition between banks and stronger supervision may even lower borrowing costs for their customers, according to an OECD report issued Wednesday.
In its latest "Going for Growth" report, the Organisation for Economic Cooperation and Development said the economic crisis had been "a forceful reminder of the vital role of prudential regulation in financial markets".
The report comes as government, and the banking industry are feeling their way towards toughening up the oversight, seen as one of the factors behind the 2008 banking crisis.
Looking at rules ranging from capital requirements and bank supervision to depositor protection, auditing and ownership, the OECD said the right balance had to be struck and warned against regulation.
But it said its study suggested there was no overall indication of an adverse effect from prudential regulation. It also noted that having a strong bank supervisory authority actually appeared to increase competition.
"Taken at face value, the empirical analysis suggests that increasing the strength of the supervisor can reduce the average cost of credit faced by borrowers by a few tenths of a percentage point," the report said.
The OECD said in certain specific regulatory areas, notably where rules on ownership or entry to a sector were tightened, there may be a negative effect but it said strong bank supervisors were key to guaranteeing competition.
"For example, where supervisors are strong, stricter capital requirements or a more credible threat of forced exit are found to go along with more competitive banking systems.
"The reverse is true when the supervisors are weak," it said.
"Likewise strong supervisors seem to mitigate the anti-competitive effects of stringent entry and ownership regulations," it added.
The comments on banking supervision formed part of a report urging governments to focus more strongly on reforms now the "nadir" of the economic crisis was past.
