Alberto Heimler Regulatory Reforms and Competition: How to Push the Agenda Forward

1. Alberto HeimlerRegulatory Reforms and Competition: How to Push the Agenda Forward Discussion by İnci Ötker-Robe International Monetary Fund

2. What is the paper about? • Challenges faced by the Italian Antitrust Authority to: • push forward competition-oriented reforms, and • convince legislators to intervene, so as to prevent unjustified restrictions to competition

3. What is the paper about? (2) • Resistance to competition: • Greater competition enhances drive for innovation • Competition helps increase set of consumer choices • But still: competition-oriented reforms trigger strong oppositions • Fear of destruction of existing jobs vs. Hope of creation of growth opportunities

4. Why is it so difficult to make a case for competition? • Large number of special interest groups • Well organized & concentrated • Lots to lose from competition. On the contrary: • Losers from restrictions to competition: • Scattered with not much to lose from restriction • Differing views about merits of competition: • Special interests present competition as disruptive, while justifying restrictive regulations as beneficial to the general interest of the society • Differing perceptions of gains vs. losses from competition • More difficult to give up something owned than to gain something unexpected • Uncertainty vs. opportunity trade-off

5. The initiatives/proposals to promote competition… • Role of the EC in favoring competition oriented reforms in member states  “Scapegoat” (in telecommunications, electricity, railroad transportation, services, and banking) • Channel competition into a “technical debate” away from “political debate”  focus on substance to achieve progress toward competition • Some useful regulatory tools: • Regulatory impact analysis (RIA) • Competition impact assessment (CIA) • Make sure choices are made with full information on alternatives  transparency

6. Comments and suggestions (1) • The paper contains a wealth of information with many details • Would be beneficial to illustrate the paper’s arguments and proposals with one single example: e.g.: competition in the banking sector!

7. Example: Impact of regulatory reform on banking sector competition “Technical debate”: Present technical arguments on: • Benefits of greater competition and reduced regulatory restrictions on banks • increased efficiency and greater sophistication of products • better risk management techniques • better opportunities for borrowers and lenders,... • Potential costs from increased competition • aggressive lending behavior • relaxed risk management practices for bigger market shares • risks to financial stability….  A challenge for many CEE countries with competitive banking systems after the entry of foreign banks • Guiso, Sapienza, Zigales (2006, NBER) finds that adverse consequences of deregulation/liberalization were greater where restriction to bank competition were most severe at the start.

8. Example: Impact of regulatory reform on banking sector competition • Provide arguments for implications of certain restrictive regulations to achieve particular objectives (e.g., restrictions on banks’ activity to safeguard stability)  RIA (cost/benefit analysis)  CIA (less restrictive option to achieve the same objective?)  role for prudential regulations? • All these considerations and technical arguments could help provide a better information set in making a stronger case for competition….

9. Comments and suggestions (2) • Elaborate on the competitive position of the Italian banking sector to put the argument for promoting competition into perspective. • Despite the initiatives, retail banking sector continues to be segmented along national boundaries • Elaborate on why competition is still limited • High price of banking services? • High switching costs between banks (€34 in Italy) (Drummond, Maechler, Marcelino (2007), IMF WP)

10. Issues for discussion (1) • What more could EC, EU do to promote competition? • Efforts to accelerate “financial integration” within Europe to reduce scope for country specific regulatory/supervisory practices that may create undue costs for market participants in the way of a single market? • Are there incentive compatible frameworks that would make greater competition beneficial for everyone? • Role for the Lisbon Agenda? • To address intra-area divergences, with national reform programs focusing on making the single market a reality, by opening up services markets to competition by EU partners. • Role for better policy coordination, identification of common goals and priorities, or political will in accelerating progress in these areas?

11. Issues for discussion (2) • What lessons can we draw for countries in the road to the EU, if EU countries themselves are facing challenges in promoting competition? • What could the CEE countries could do, to benefit most from increased competition while mitigating potential costs?