SME Finance Policy Guide

G-20 SME FINANCE POLICY GUIDE
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Best Practice: Coherence between competition policy and regulatory policy
Close collaboration is recommended between the regulator (in charge of financial stability and prudential regulation
and supervision) and the competition authority (in charge of keeping the market competitive).
• •First, regulatory requirements and competition policy need to be coordinated.
• •Second, a protocol for cooperation between the regulator and the competition authority should be developed.
This is particularly important in crises. The competition authority can commit to addressing too-big-to-fail problems
that lead to competition distortions; the regulator can address the too-big-to-fail issue and moral hazard through
systemic capital charges, effective resolution procedures, and restrictions on the scope of banking activities that
target conflicts of interest.
• •Finally, crisis procedures should be established that define liquidity help from recapitalization and conditions for
restructuring to avoid competitive distortions. Entities close to insolvency should be tightly regulated (and activities
restricted) in a framework permitting prompt corrective action.”
Source: Vives (2010)
developing countries will also be subject to more stringent
capital requirements (with greater reliance on
core tier capital), leverage ratios, and other rules being
proposed at the international level by the BCBS. This
should not pose an immediate problem, as emerging
country banks are generally better capitalized and less
leveraged than banks in developed countries, but these
banks will need to build up more capital in order to
meet the growing needs of their economies, including
the demand for credit by SMEs. Emerging country
banks will also need to strengthen their risk governance
in line with the more stringent standards being
currently proposed by the BCBS.
Financial sector liberalization and banking regulations
that allow the entry of sound and efficient banks
(both foreign and domestic) and promote market
competition may reduce margins and interest rate
spreads. Such changes may also promote dynamism
within the banking sector, as providers facing tough
competition from new entrants seek new markets,
and can further encourage local banks to look beyond
traditional business lines, incentivizing them to
develop SME banking. At a national level, openness to
foreign banks may serve to increase access to capital,
although it may also increase the risk of contagion
from financial crises originating elsewhere, thus
reinforcing the need for a sound regulatory
framework. The 1989 World Development Report
provides a summary of sequencing strategies that
should be followed in liberalizing financial sectors,
in order to minimize the risk of instability.
Challenges and priorities for LDCs
In smaller and/or lower income countries, policymakers
seeking to stimulate greater competition may only
have access to a limited range of effective tools.
Research on competition that targets developed countries
suggests that a liberal entry policy vis-à-vis reputable
financial service providers can help. Also of use
are transparency of product pricing and the compulsory
sharing of credit information, and rules about
network access and interoperability of networks in the
retail payments system. However, the latter may not be
fully effective, since the applicability to developing
countries of lessons learned in advanced economies is
not straightforward.
C.2. Financial Infrastructure
Financial infrastructure as defined here includes
accounting and auditing standards, credit reporting
systems (credit registries and bureaus), collateral and
insolvency regimes, and payments and settlement
system. Financial infrastructure reduces the