Introduction

Many traditional analyses of the banking sector rely on the notion of perfect competition among banks (with the notable exception of some classic contributions such as Klein, 1971, and Monti, 1972). But if, for various reasons, the sector is concentrated, and if the market power of banks comes into play, the interaction of oligopolistic strategies with the principles of prudential regulation by the central banker should be reconsidered, with the help of some well defined game-theoretic model. This, we think, would essentially be the philosophy of Louis Phlips. In his 1995 address at the meeting of the European Economic Association (see Phlips, 1996), Louis explicitly advocated a more systematic use of game-theoretic reasoning within the field of competition policy (see also Phlips, 1983). In the banking sector, prudential regulation and competition policy are in many respects intertwined, and the present chapter can be viewed as an attempt to integrate contemporary industrial organisation methods with the theory of financial intermediation.

The way to this approach has been paved by a number of forerunners, who also based their approach on imperfectly competitive models of banking.