A New Measure of Competition in the Financial Industry: The by Jacob A Bikker, Michiel van Leuvensteijn

By Jacob A Bikker, Michiel van Leuvensteijn

The 2008 credits main issue begun with the failure of 1 huge financial institution: Lehman Brothers. when you consider that then the focal point of either politicians and regulators has been on stabilising the economic system and fighting destiny monetary instability. At this juncture, we're on the final level of future-proofing the monetary quarter by means of elevating capital necessities and tightening monetary law. Now the coverage time table must be aware of reworking the banking quarter into an engine for development. Reviving festival within the banking region after the kingdom interventions of the earlier years is a key step during this process.

This ebook introduces and explains a comparatively new idea in festival size: the performance-conduct-structure (PCS) indicator. the major concept in the back of this degree is firm’s potency is extra hugely rewarded when it comes to industry proportion and revenue, the more desirable aggressive strain is. The e-book starts by means of explaining the monetary market’s primary stumbling blocks to pageant offering a short survey of the advanced courting among monetary balance and pageant. The theoretical contributions of Hay and Liu and Boone give you the theoretical underpinning for the desktops indicator, whereas its software to banking and coverage illustrates its empirical traits. eventually, this ebook provides a scientific comparability among the result of this technique and (all) present equipment as utilized to forty six nations, over an analogous pattern interval.

This ebook offers a finished evaluation of the knowns and unknowns of economic quarter festival for advertisement and imperative bankers, policy-makers, supervisors and lecturers alike.

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The elasticity of residual demand for financial services is limited, in practice, as substitutes are rare. Bank savings, investment funds and life insurance policies (such as annuities) are, in principle, substitutes for each other, but only in a limited way since their characteristics differ substantially in terms of risk, liquidity and tax treatment. For other financial services, substitutes are absent. Foreign competition may help to alleviate this problem. However, in practice, cross-border competition is often limited, particularly since consumers seldom seek services of foreign banks.

A bank whose market value exceeds its book value that is insolvent on a book value basis only still has a valuable charter left. So when its market value falls below the book value due to reduced market power, it has less incentive to avoid default at any price. Keeley’s empirical results support this hypothesis. Banks with more market power have a larger market-to-book assets ratio, hold more capital relative to assets and have a lower default risk. The latter is reflected in lower risk premiums in their interest rates on uninsured deposits, that is, not covered by a deposit guarantee system.

1╇ Determinants of imperfect competition on financial markets Coordinated factors Unilateral factors Few financial institutions Few financial institutions Supply side factors – Essential High entry and exit barriers High entry barriers – Important Frequent interaction Heterogeneous products Transparency Structural links Symmetry Adverse selection Low firm-level elasticity of demand (incl. switching costs and lock-in effects) Ditto Stable demand Imperfect financial advice Demand side factors factors refer to explicit or tacit collusion, while unilateral factors refer to actions undertaken by individual financial institutions without any form of coordination with other financial institutions.

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