A New Measure Of Competition In The Financial Industry

The 2008 credit crisis started with the failure of one large bank: Lehman Brothers. Since then the focus of both politicians and regulators has been on stabilising the economy and preventing future financial instability. At this juncture, we are at the last stage of future-proofing the financial sector by raising capital requirements and tightening financial regulation. Now the policy agenda needs to concentrate on transforming the banking sector into an engine for growth. Reviving competition in the banking sector after the state interventions of the past years is a key step in this process. This book introduces and explains a relatively new concept in competition measurement: the performance-conduct-structure (PCS) indicator. The key idea behind this measure is that a firm’s efficiency is more highly rewarded in terms of market share and profit, the stronger competitive pressure is. The book begins by explaining the financial market’s fundamental obstacles to competition presenting a brief survey of the complex relationship between financial stability and competition. The theoretical contributions of Hay and Liu and Boone provide the theoretical underpinning for the PCS indicator, while its application to banking and insurance illustrates its empirical qualities. Finally, this book presents a systematic comparison between the results of this approach and (all) existing methods as applied to 46 countries, over the same sample period. This book presents a comprehensive overview of the knowns and unknowns of financial sector competition for commercial and central bankers, policy-makers, supervisors and academics alike.

For academics, regulators and policymaker alike, it is crucial to measure financial sector competition by means of reliable, well-established methods. However, this is easier said than done. The goal of this Handbook is to provide a collection of state-of-the-art chapters to address this issue. The book consists of four parts, the first of which discusses the characteristics of various measures of financial sector competition. The second part includes several empirical studies on the level of, and trends in, competition across countries. The third part deals with the spillovers of market power to other sectors and the economy as a whole. Finally, the fourth part considers competition in banking submarkets and subsectors.

This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such asthe loan market, where as many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-basedmeasures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative bank.

The 2008 credit crisis started with the failure of one large bank: Lehman Brothers. Since then the focus of both politicians and regulators has been on stabilising the economy and preventing future financial instability. At this juncture, we are at the last stage of future-proofing the financial sector by raising capital requirements and tightening financial regulation. Now the policy agenda needs to concentrate on transforming the banking sector into an engine for growth. Reviving competition in the banking sector after the state interventions of the past years is a key step in this process. This book introduces and explains a relatively new concept in competition measurement: the performance-conduct-structure (PCS) indicator. The key idea behind this measure is that a firm’s efficiency is more highly rewarded in terms of market share and profit, the stronger competitive pressure is. The book begins by explaining the financial market’s fundamental obstacles to competition presenting a brief survey of the complex relationship between financial stability and competition. The theoretical contributions of Hay and Liu and Boone provide the theoretical underpinning for the PCS indicator, while its application to banking and insurance illustrates its empirical qualities. Finally, this book presents a systematic comparison between the results of this approach and (all) existing methods as applied to 46 countries, over the same sample period. This book presents a comprehensive overview of the knowns and unknowns of financial sector competition for commercial and central bankers, policy-makers, supervisors and academics alike.

"The relationships among competition in the financial sector, access of firms to external financing, and associated economic growth are ambiguous in theory. Moreover, measuring competition in the financial sector can be complex. In this paper Claessens and Laeven first estimate for 16 countries a measure of banking system competition based on industrial organization theory. They then relate this competition measure to growth of industries and find that greater competition in countries' banking systems allows financially dependent industries to grow faster. These results are robust under a variety of tests. The results suggest that the degree of competition is an important aspect of financial sector funding. This paper--a product of the Financial Sector Operations and Policy Department--is part of a larger effort in the department to study competition in banking"--World Bank web site.

The relationships among competition in the financial sector, access of firms to external financing, and associated economic growth are ambiguous in theory. Moreover, measuring competition in the financial sector can be complex. In this paper the authors first estimate for 16 countries a measure of banking system competition based on industrial organization theory. They then relate this competition measure to growth of industries and find that greater competition in countries' banking systems allows financially dependent industries to grow faster. These results are robust under a variety of tests. Their results suggest that the degree of competition is an important aspect of financial sector functioning.

Bank competition can induce excessive risk taking due to risk shifting. This paper tests this hypothesis using micro-level U.S. mortgage data by exploiting the exogenous variation in local house price volatility. The paper finds that, in response to high expected house price volatility, banks in U.S. counties with a competitive mortgage market lowered lending standards by twice as much as those with concentrated markets between 2000 and 2005. Such risk taking pattern was associated with real economic outcomes during the financial crisis, including higher unemployment rates in local real sectors.

Financial services firms play a key role in the European economy. The efficiency and profitability of these firms and the competition among them have an impact on allocation of savings, financing of investment, economic growth, the stability of the financial system and the transmission of monetary policy. This collection of research contributions includes evaluations of trends in the European financial service industry and examinations of the driving forces of efficiency, competition and profitability of financial firms and institutions in Europe. The papers have been written by leading academics and researchers in the field, who specialize in strategic, systematic and policy issues related to the European financial services industry. This edited collection will be will be essential reading for students and academics but will also be of interest to financial practitioners and government officials interested in acquiring a deeper understanding of this complex issue.