Abstract
This paper rigorously investigates the determinants of bank competition for 146 countries over the sample period 1999–2011. The results employing both the Lerner index and the Boone indicator, reveal the distinctive characteristics of the competition drivers across different income groups of countries. Amongst other things, a concentrated banking system jeopardises competitiveness in developing economies, however, such a causal nexus is absent for advanced and emerging economies. Contestability and institutional development seem to boost competition in less-developed banking systems, whereas inter-industry competition and financial freedom are beneficial to advanced banking systems. These findings survive robustness tests.
Highlights
The essential role of bank credit as an input in the production of goods and services places banks in a unique and influential position, such that any inefficiency in credit allocation, or other marketଝ We thank an anonymous referee of the journal for constructive suggestions
To assess the real situation of banking systems in terms of competition, we investigate the evolution of competition by relating it to market structure, contestability, inter-industry competition and institutional and macro-economic conditions
We find no statistical evidence that variations in bank competition can be explained by regulatory variables for advanced economies
Summary
The essential role of bank credit as an input in the production of goods and services places banks in a unique and influential position, such that any inefficiency in credit allocation, or other market. The banking sector can impose severe costs on an economy, if there is anticompetitive behaviour, leading to inefficiency or market failure among banks This vindicates the importance of more research into this issue, where the degree of banking competition and its association with banking structure, regulations, institutions and other key characteristics of a country is essential for welfare-related public policy in the banking industry. Estimation of competition, i.e. the inverse of market-power, is heavily influenced by the New Empirical Industrial Organization (NEIO) literature This literature has been developed primarily from the models of, for instance, Bresnahan (1982) and Panzar and Rosse (1987). The published data at country-level by the World Bank (Global Financial Development Database 2012) are utilised for the Lerner index and the Boone indicator.
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