A Horserace or Boost in Market Power? Banking Sector Competition after Foreign Bank Exits
48 Pages Posted: 23 Dec 2015 Last revised: 16 Mar 2016
Date Written: March 6, 2016
Recently, massive bank exits have begun to be observed around the world. What is the effect of such bank behavior on the market power of the remaining banks and on competition between rivals? Do financial crises change this relationship? We test these questions on a sample of 226 foreign banks’ withdrawals, which occurred between 1996 and 2014 in 54 countries. We find that the impact of bank exits on the market power of other banks is non-linear, shaped like a U-curve. Moreover, we document that the largest increase in market power is when a divested bank accounts for around 10% of market share. After this threshold, the effect diminishes and even has a negative sign. In addition, we find that banking market power significantly increases during financial crises; however, in normal times, banks participate in a horserace.
Keywords: banking sector competition, banking market power, foreign banks, bank exits, financial crises
JEL Classification: F21, F23, G21, G01, L16
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