On the optimality of bank competition policy |
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| Institution: | 1. Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, United States;2. Kamakura Corporation, United States;3. Shanghai Advanced Institute of Finance and China Academic of Financial Research, Shanghai Jiaotong University, Shanghai 200030, China;1. Wits Business School, University of the Witwatersrand, 2 St. Davids Place, Parktown, Johannesburg 2193, South Africa;2. School of Business and Economics, University of Brunei Darussalam, Jalan Tungku Link, Gadong BE 1410, Brunei Darussalam;1. BBVA Research – Ciudad BBVA, C/ Azul, 4 - La Vela - 5th Floor, 28050 Madrid, Spain;2. Clemson University, John E. Walker Department of Economics, Clemson University, Clemson, SC 29634, United States;3. Bank of Spain, Alcala 48, 28014 Madrid, Spain;1. ABV-Indian Institute of Information Technology & Management, Gwalior, 474015, India;2. School of Computer and Systems Sciences, Jawaharlal Nehru University, New Delhi-110067, India |
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| Abstract: | This study examines whether the effect of market structure on financial stability is persistent, subject to current regulation and supervision policies. The methodology of Sala-I-Martin (1997) is employed over a sample of 2450 banks operating within the EU-27 during the period 2003–2010. The results show a potential trade-off between market power and soundness, and how possible it is to regulate this trade-off above 21% markups. Financial stability appears more pronounced in markets of less concentration, where policies lean towards limited restrictions on non-interest income, official intervention in bank management and book transparency. Regulation and competition can act as substitute or complementary policies vis-à-vis a more stable financial system with less competition distortions. |
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