Competition and Antitrust Policy in Banking

Abstract

This article begins by describing the various methods proposed in the academic literature to assess the state of competition in the banking industry, discussing in detail the issues and the practical limitations encountered in their use. Importantly, it discusses several new methodologies in competition analysis that stem from recent developments in the industrial organization literature. Among the main approaches to measuring competition, the review begins with the Structure-Conduct-Performance (SCP) paradigm, which has been extensively used in the literature. Over time, researchers have developed new methods as a way to counter the problems posed by the SCP paradigm; these new methods have come to be known as the New Empirical Industrial Organization. The new methods focused on a single industry, and introduced theoretical models to analyze firm behaviour such that the degree of market power could be identified and estimated. The article then discusses the rationale behind the antitrust policies employed in the US and the European Union, and the empirical challenges in their application. It concludes by drawing attention to the link between antitrust regulation, bank competition, and risk taking, which gives rise to questions especially pertinent after the financial crisis that began in 2007.