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Bank Concentration & Competition

 Agenda   |   Papers   |     Datasets

April 3-4, 2003,  World Bank Headquarters, Washington, D.C.

Well-functioning banks promote national economic growth, improve the efficiency with which credit is allocated, and boost the growth prospects of small and medium enterprises. Thus, information on which policies enhance the operation of banks is relevant for developing national strategies to promote overall economic development and alleviate poverty.

Policymakers around the world frequently express concern about whether their countries’ bank competition policies are appropriately designed to produce well-functioning and stable banks. Authorities want to know what indicators they should use to gauge the degree of competitiveness of their banking industries. Furthermore authorities seek guidance on how pro-actively they should influence the size distribution of banks and whether there are adverse implications from increasing bank competition. Globalization and the resulting consolidation in banking have further spurred interest in this issue, leading to an active public policy debate.

Competition policies in banking may involve difficult trade-offs. While greater competition may enhance the efficiency of banks with positive implications for economic growth, greater competition may also destabilize banks with costly repercussions for the economy. Similarly, while greater competition may produce banks that give small firms the ability to exercise their entrepreneurial energies, this competition may yield less stable banks that are prone to devastating crises. This research project explores these issues by assessing the impact of bank competition on efficiency, stability, and the ability of small firms to access the banking sector.

There is not single, accepted measure of bank competition. For lack of a better measure, bank concentration is often used as an indicator of bank competition. The competitive environment is also influenced by bank regulations, such as restrictions on entry, exit, and bank activities, as well as national institutions that govern economic freedom in general. The ownership structure of banks, such as the extent of state or foreign ownership in banking, and macroeconomic and financial conditions may also play an important role. We use all of these measures.

This research studies the impact of bank concentration, regulations, ownership and institutional development on (i) financial stability, (ii) bank margins, and (iii) firms’ access to financing. The objective is to better understand the different elements that contribute to the overall level of banking competition, benchmark bank competition/concentration around the world, and investigate the different trade-offs involved in decisions regarding regulatory interventions to alter market structure.

Contacts: Asli Demirguc-Kunt and Ross Levine




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