State-Owned Banks as Competition Enhancers, or the Grand Illusion

We analyze the role of state ownership in the banking sector from the perspective of competition. That is, do state-owned banks play a special role as competition enhancers? Focusing on the market for mortgage loans in Switzerland, we test four hypotheses which are consistent with this view. First, are state-owned banks’ interest rates relatively cost sensitive? Second, are state-owned banks charging relatively low mark-ups? Third, are the state-owned banks’ interest rates particularly borrower friendly? And fourth, do state-owned banks exert a disciplinary effect on competitors’ prices? Based on a comprehensive database containing information at the individual bank level over the 1996–2002 period, our answer is ‘No.’