Competition in Banking: A Review of the Literature

Carol Ann Northcott

Staff Working Papers from Bank of Canada

Abstract: The author reviews the theoretical and empirical literature to examine the traditional perception that the following trade-off exists between economic efficiency and stability in the banking system: a competitive banking system is more efficient and therefore important to growth, but market power is necessary for stability in the banking system. That this trade-off exists is not clear. Market power can have positive implications for efficiency, and the potentially negative implications of competition on stability may be manageable through prudential regulation. Neither extreme (perfect competition nor monopoly) is likely ideal. Rather, it may be optimal to facilitate an environment that promotes competitive behaviour (contestability), thereby minimizing the potential costs of market power while realizing benefits from any residual that remains. It can be very difficult to assess the contestability of a banking market. Recent work suggests that the number of banks and the degree of concentration are not, in themselves, sufficient indicators of contestability. Other factors play a strong role, including regulatory policies that promote competition, a well-developed financial system, the effects of branch networks, and the effect and uptake of technological advancements.

Keywords: Financial institutions; Financial services; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: G21 G28 L11 L12 L13 L16 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004
New Economics Papers: this item is included in nep-cfn, nep-com, nep-fin and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (85)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-24

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