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Ownership Concentration and Competition in Banking Markets

Alexandra Lai () and Raphael Solomon

Staff Working Papers from Bank of Canada

Abstract: Many countries prohibit large shareholdings in their domestic banks. The authors examine whether such a restriction restrains competition in a duopolistic loan market. Blockholders may influence managers' output decisions by choosing capital structure, as in Brander and Lewis (1986). For the blockholder, debt has an additional benefit: it "disciplines" a manager by reducing the amount of free cash flow from which the manager can divert funds. A larger blockholder can exert more control. The authors show that an economy with blockholders often leads to a more competitive banking sector. Hence, a restriction on the size of blockholdings has anti-competitive results.

Keywords: Financial institutions; Financial services; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 L10 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006
New Economics Papers: this item is included in nep-ban, nep-com, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:06-7

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