Concentration and competition in the Brazilian credit market

Abstract

AbstractCompetition and concentration effects in the banking sector is still a highly object questioned in the public policy. Problems of asymmetric information and high interest rates prompt the discussion on whether bank competition is good or bad for efficiency, or more generally, for social welfare. In recent years, a lot of research work has been carried out investigating the nature of competition in the banking industry. Since the 2008 financial crisis, competition in the banking industry has been characterized with low interest rates, low credit growth, increased regulation and compliance requirements. The objective of this study is to analyze the national credit market by calculating and analyzing concentration and competition indicators, between 2010 and 2020. To compare and estimate indexes of concentration, such as the Herfindahl‐Hirschman index and competition through the Lerner index. The results suggest that the concentration has decreased in the period considered so as competitiveness, suggesting that there is less competition in the market. Despite the limitations pointed out, the results suggest that bank concentration in the Brazilian financial market has been decreasing over the last few years due to an increase position and importance of new players such as Digital Banks, Fintechs and High‐Techs firms, which caused a decrease in the market share of large banks. Although, competition levels are not improving, showing that the market share is being absorbed by Financial Institutions with a considerable size and perhaps not by new entrants in the market.