A policy of prudential supervision that – by choice or because obliged by law – ignored competition or, worse, thought it could be sacrificed in the name of stability would be selfcontradictory. I shall back up these propositions – of whose validity the Bank of Italy remains thoroughly and analytically convinced – with a theoretical consideration and empirical evidence.
Simplifying, the theoretical consideration can be quickly set forth. By their nature or in response to the urgings of supervisors, banks are risk-averse. They are in equilibrium if lower returns correspond to lower risk. Competition erodes quasi-rents, the extra profits of oligopoly. Other things being equal, therefore, competition does not induce banks to take on greater risk.