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Competition in fragmented markets: New evidence from the German banking industry in the light of the subprime crisis

Nils Moch

Journal of Banking & Finance, 2013, vol. 37, issue 8, 2908-2919

Abstract: Of all of the EU member states, Germany has the largest banking market. However, not all German banking institutions necessarily face fierce competition. Because the industry is highly fragmented, strict separation of the three existing banking pillars may impede competition, with negative effects on financial stability. We assess the competitive stances of 1,888 universal banks from 2001 to 2009 by using the Panzar–Rosse revenue test. We find evidence that measuring competition at an average country level does not necessarily generate valid evaluations of fragmented markets. In addition, we find no clear indication that either the particular objectives of cooperative and savings banks or the legal protection of these institutions impedes competition or discriminates against private banks. Therefore, as long as the relationship between competition and financial stability is dubious, the overall effect and the social costs or benefits of political measures that influence the structure of the German banking market are at least questionable.

Keywords: Competition; Banking industry; Panzar–Rosse; Financial stability; Too-big-to-fail (search for similar items in EconPapers)
JEL-codes: D20 D40 D53 G21 G28 L11 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:2908-2919