Competition Among Banks: Introduction and Conference Overview

Posted: 6 Jan 2002

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Jan Pieter Krahnen

Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Center for Financial Studies (CFS); Centre for Economic Policy Research (CEPR)

Anthony M. Santomero

University of Pennsylvania - The Wharton School

Abstract

The U.S. traditionally had a radically different view of competition in the financial sector compared to other countries. Distrust of power in the hands of large financial institutions very early led to restrictions on the ability of banks to expand geographically or to diversify into other activities. Throughout the nineteenth century the U.S. banking system was highly fragmented and unlike every other industrializing country the U.S. failed to develop nationwide banks with extensive branch networks. Prior to the Civil War, states were free to regulate their own banking systems and there was no national system. Many states adopted a "free banking" system that allowed free entry. The advent of the Civil War in 1861 significantly changed the role of the Federal Government in the financial system. The National Bank Acts of 1863 and 1864 set up a national banking system. These granted limited powers to banks. In particular, the 1864 Act was interpreted as confining each to a single location. This ensured there were a large number of banks. It is often argued that this promotes competition.

In other countries, including both those with market-oriented systems and those with bank-oriented systems, the banking sectors became highly concentrated many years ago. For example, in the U.K. banks developed nationwide networks during the latter part of the nineteenth century, so that by the beginning of the twentieth century there were essentially only five major banks. Other industrialized countries also experienced consolidation and the development of nationwide networks around this time. In many cases governments actively encouraged this change.

Suggested Citation

Allen, Franklin and Gersbach, Hans and Krahnen, Jan Pieter and Santomero, Anthony M., Competition Among Banks: Introduction and Conference Overview. European Finance Review, Vol. 5, No. 1-2. Available at SSRN: https://ssrn.com/abstract=292942

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jan Pieter Krahnen

Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30080 (Phone)
+49 69 798 30077 (Fax)

Center for Financial Studies (CFS) ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60629
Germany
+49 69 798 30050 (Phone)
+49 69 798 30077 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Anthony M. Santomero

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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