The purpose of this article is to discuss from a Post Keynesian perspective the challenges of prudential regulation for the dynamics of bank competition. These key institutions of the payment and credit system are submitted to the irresistible logic of increased wealth in a world of uncertainty and irreversibility. In this context, they tend to assume risks that increase their inherent instability. Central banks, seeking to avoid becoming the lender of last resort, have attempted to limit the space for bank competition through prudential regulation. However, banks have continued to develop new practices and instruments allowing them to circumvent such regulatory requirements. A continuous tension thus emerges between the innovative competitive process of the banks and the need to perfect regulation. This challenge has grown further in the current context of globalization and market integration and also of notable technological advances that allow for the development of new financial products based on sophisticated and complex financial engineering, whose side effects are difficult to predict.
Banking regulation; Banking competition; Financial innovations; Lender of last resort; Post Keynesian economics