Real effects of bank competition

Does banking market power contribute to the formation of non-financial industries populated by few, large firms, or does it instead enhance industry entry? Theoretical arguments could be made to support either side. The banking industry of European Union (EU) countries has been significantly deregulated in the early 1990s. Under the old regime, cross-border expansions were heavily constrained, while after deregulation banks from EU countries have instead been allowed to branch freely into other EU countries. Concurrently to the process of deregulation, European banking industries have also experienced a significant process of consolidation. Exploiting such significant innovations affecting the banking industries of EU countries, this paper explores whether changes in bank competition have in fact played a role on the market structure of non-financial industries. Empirical evidence is derived from a panel of manufacturing industries in 29 OECD countries, both EU and non-EU members, adopting a methodology that allows controlling for other determinants of industry market structure common across industries, across countries or related to time passing. The evidence suggests that the overall process of enhanced competition in EU banking markets has lead to markets in non-financial sectors characterized by lower average firm size.Bank competition ; Bank mergers

The role of financial services in economic growth

Financial services industry

Entry and competition in highly concentrated banking markets

This article studies conditions of entry and competitive conduct in highly concentrated banking markets. The author estimates the minimum market size at which a second bank, a third, a fourth, and so on, can enter and maintain long-run profitability. The results suggest no evidence of cartel-like behavior, where banks collude and maximize joint monopoly profits, even in markets with only two or three banks. The results are more consistent with the competitive conduct predicted by models of oligopolistic behavior.Bank competition ; Bank marketing

Does bank concentration lead to concentration in industrial sectors?

This paper explores the effect of banking market structure on the market structure of industrial sectors. It asks whether concentration in the banking market promotes the formation of industries constituted by a few, large firms, or rather, whether it facilitates the continuous entry of new firms, thus maintaining unconcentrated market structures across industries. Theoretical arguments could be made to support either hypotethical scenario. Empirical evidence is derived from a sample of 35 manufacturing industries in 17 OECD countries, adopting a methodology that allows controlling for other determinants of industry market structure common across industries or across countries. Bank concentration is found to enhance industries' market concentration, especially in sectors highly dependent on external finance. Such effect is however weaker in countries characterized by higher overall financial development.Banking market

Competitive analysis in banking: appraisal of the methodologies

How do we measure in the banking industry? This article provides an overview of the methodology currently used in competitive analysis and highlights an alternative techniques that could be used to complement this methodology. Given the ongoing process of consolidation in U.S. banking, assessing the competitiveness of financial services markets is an important issue for policymakers.Bank mergers ; Banks and banking

Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data

This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately.

Bank Competition and Regulatory Reform: The Case of the Italian Banking Industry

The paper analyzes the evolution of competitive conditions in the Italian banking industry using firm-level balance sheet data for the period 1983-1997. Regulatory reform, large-scale consolidation, and competitive pressure from other European countries have changed substantially the banking environment, with potentially offsetting effects on the overall degree of competitiveness of the banking market. We find that competitive conditions, relatively unchanged until 1992, have improved substantially thereafter, with estimated mark-ups decreasing over the last five years of the sample period. Also, there is no evidence that banks involved in mergers and acquisitions gained market power; at the same time, however, they exhibit lower than average marginal costs. Finally, after controlling for various factors that may have determined the time pattern of banksÂ’ estimated mark-ups, we still detect a significant unexplained drop in our competitive conditions indicators after 1992. This is consistent with the hypothesis that the introduction of the Single Banking License in 1993 contributed to improve bank competition.bank competition, mergers and acquisitions, Lerner, consolidation

Banking market structure, financial dependence and growth: international evidence from industry data

This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which imparts all sectors and all firms indiscriminately.Bank management ; Banking market

Bank competition and regulatory reform: the case of the Italian banking industry

This study analyzes the evolution of competitive conditions in the Italian banking industry using firm-level balance sheet data for the period 1983-1997. Regulatory reform, large-scale consolidation, and competitive pressure from other European countries have changed substantially the banking environment, with potentially offsetting effects on the overall degree of competition of the banking market. We find that competitive conditions, relatively unchanged until 1992, have improved substantially thereafter, with estimated mark-ups decreasing over the last five years of the sample period. Also, there is no evidence that banks involved in mergers and acquisitions gained market power; at the same time, however, they exhibit lower than average marginal costs. Finally, after controlling for various factors that may have determined the time pattern of banks’ estimated mark-ups, we still detect a significant unexplained drop in our competitive conditions indicators after 1992. This is consistent with the hypothesis that the introduction of the Single Banking License in 1993 contributed to improve bank competition.Bank supervision ; Banks and banking - Italy

Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets

This paper tests how competition in local U.S. banking markets affects the market structure of non-financial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. The empirical evidence, however, strongly supports the idea that in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets where banking is more competitive.