Contestability, Technology and Banking

33 Pages Posted: 6 Feb 2002

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Sandrine Corvoisier

European Central Bank (ECB)

Date Written: October 2001


Information technology affects banking in two main ways. First, it may reduce costs by replacing paper-based, labour intensive methods with automated processes. Second, it may modify the ways in which consumers have access to banks' services and products and, hence, may enhance the contestability of markets, especially in retail banking. In this paper, we focus on the second aspect. We measure the degree of competition using retail interest margins for a number of different bank products and analyse the effect of technology within a simple model of contestability. Based on the model, we argue that technology has reduced sunk costs for deposits more than for loans. We test this conjecture by estimating the model using semi-aggregated data for a panel of 10 of the 12 euro area countries. Hence, we utilise time series and cross-sectional variation in the use of technology, which circumvents some of the problems in the measurement of sunk costs encountered in the previous literature. We find strong support for an increase in contestability in time deposit markets, and effects that are more moderate for loan markets. These results appear to be robust across a variety of econometric specifications.

Keywords: Banking structure, Contestability, Technology, Internet

Suggested Citation

Gropp, Reint and Corvoisier, Sandrine, Contestability, Technology and Banking (October 2001). Available at SSRN: or

Reint Gropp (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108

Sandrine Corvoisier

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
+49-69-13446421 (Phone)
+49-69-1344-8553 (Fax)

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