We also support competition because before the financial crisis, there wasn’t enough and some banks were ‘too big to fail’.
‘Big’ refers to how interconnected they were to the economy. Measures had to be taken if these banks were ever in trouble, to make sure they could continue to provide services.
However, during the financial crisis, the biggest banks realised they would be bailed out…which made them take more risks.
An example of this is the collapse of the investment bank Lehman Brothers in 2008. Extreme risk-taking led to bankruptcy. This increased the impact of the financial crisis on the economy and so huge bail-outs were made to prevent more harm being done.
Competition is one way to help avoid this happening again. If there are lots of smaller banks offering great services, its unlikely people will only bank with major firms. Banks will then take fewer risks as they know they won’t be bailed out in a crisis because their failure would only have a minor impact on the economy.