Prudential measures and their adverse effects on bank competition: The case of Brazil

Abstract

After the 2008–2009 financial crisis, there was an increase in prudential measures to limit banking and systemic risk in several countries. The empirical studies related to this topic have focused, in general, on assessing the effectiveness of such instruments. This article addresses the associated costs (adverse effects) of these prudential measures on banking competition. We use a novel approach that employs a stochastic frontier model to measure Brazilian banks' mark-up and estimate the impact of prudential measures on market power. Our results suggest that the tightening of prudential measures increases banks’ mark-up and, consequently, has a negative impact on banking competition. Our finding suggests that financial regulators should consider this adverse effect when designing regulations to promote financial stability without harming competition in the banking system.