Barriers to Bank Entry

Abstract

The entry condition in banking is a critical element in framing a public policy on the regulation of bank charters, branching, and mergers. According to the prevailing view, entry into banking would be relatively easy in the absence of legal (including regulatory) restrictions on entry [10, 495]. Those who oppose unrestricted competition in banking argue that free entry would lead to overbanking, competition, and bank failures. Those who favor more competition in banking stress that the social cost of protecting banks against failure has been excessive and that free entry could prevent the development of monopoly in banking or effectively constrain its market power.' The common denominator in these opposing policy positions is the underlying belief that free entry in banking2 is synonymous with relatively easy entry and competition. It is the purpose of this paper to reexamine the nature and market effects of the bank entry condition under free entry in light of Bain's seminal analysis of entry barriers in manufacturing industries [3]. It will be argued that the prevailing view errs in equating free entry with easy entry and competition. It is more likely that free entry would lead to a diversity of entry conditions and market results in different banking markets. The organization of the paper is as follows: Part II discusses the relation between entry and specific banking markets; Part III examines bank entry barriers (other than the need barrier [2] or the legal impediments to interstate branch banking); Part IV analyzes the effects of free entry in different markets; and Part V is the conclusion.