Competition and Banking Stability in the Euro Area: The Cases for Greece and Spain

Abstract

Banking markets across the world are evolving rapidly, under the impact of financial innovation, globalization, and information technology. Within Europe these changes are especially fast and far-reaching, accelerated by both the completion of the single market in financial services and the introduction of the Euro. The Euro and the associated deregulation of banking markets are affecting the revenues of the European banking system as a whole, and are changing the allocation of revenue between banks, with implications for financial stability and prudential regulation. Essential to the continuing stability of a banking system is that it be profitable. This paper describes the current situation of the banking industry in two countries, Greece and Spain. It provides a comparative analysis of the structure and sources of profitability for the Greek and Spanish national banking systems. Profitability has been higher and less variable in Spain compared with Greece. This comparison enables us to offer some suggestions as to the impact of deregulation and inflation on banking sector stability. A full liberalization of interest rates setting and removal of most institutional barriers restricting competition between different banking markets had an impact on both banking sectors. Higher and more variable rates of inflation in Greece can give an explanation of higher variability in bank profits compared with Spain. The paper demonstrates that there remains substantial differences, and thus responsibility for national financial systems should rest, at least for the time being, with national central banks rather than be centralized with the ECB.