What if the financial industry is fully competitive?

Of course, the current financial industry is not perfectly competitive due to various reasons. However, is it truly desirable to have a perfectly competitive financial industry.

In order to ensure it is a perfectly competitive industry, there are two key assumptions that we have to make. Firstly, the number of financial institutions is large enough to avoid an oligopoly market. Secondly, the entire market is fully aware all possible public information. Based on these two assumptions, we then can evaluate the possible outcomes of a perfectly competitive financial industry.

In the financial industry, price and utility are not the only two factors that demanders or consumers consider, each individual has own unique risk preference. Therefore, if we do not assume all consumers are homogenous, the market will inevitably be divided and differentiated according to different risk groups. Therefore, there will not be a single homogenous product sold by all financial institutions. However, within each different market targeting a specific risk group consumers, the institutions tend to provide the same product that balances its risk and return well and best suit the specific risk group. Moreover, even between the different small markets, the different products provided to different risk groups may have similar patterns that the products may contain the same items with different proportions in order to fit their consumers' risk preferences.

This will make all financial institutions have the same investment strategies, then make the economy fast abandon the industries in decline.