Banking Market Structure, Liquidity Needs, and Industrial Volatility

Abstract

This paper examines the relationship between banking market structure and industrial growth volatility. We find that regulatory restrictions on entry and competition in the banking sector increase growth volatility of the real sector, and the effect is more pronounced for industries with higher liquidity needs. On the other hand, bank concentration seems to reduce volatility, especially for industries with higher liquidity needs. Our findings are not inconsistent with each other as bank concentration may not be a good measure for competition and they may actually measure different aspects of the banking market structure.

Keywords: Market Structure, Competition, Concentration, Volatility

JEL Classification: G21, G28, E32