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Real Effects of Bank Competition

33 Pages Posted: 24 Feb 2004  

Nicola Cetorelli

Federal Reserve Bank of New York

Date Written: January 2004

Abstract

Does banking market power contribute to the formation of non-financial industries populated by few, large firms, or does it instead enhance industry entry? Theoretical arguments could be made to support either side. The banking industry of European Union (EU) countries has been significantly deregulated in the early 1990s. Under the old regime, cross-border expansions were heavily constrained, while after deregulation banks from EU countries have instead been allowed to branch freely into other EU countries. Concurrently to the process of deregulation, European banking industries have also experienced a significant process of consolidation. Exploiting such significant innovations affecting the banking industries of EU countries, this paper explores whether changes in bank competition have in fact played a role on the market structure of non-financial industries. Empirical evidence is derived from a panel of manufacturing industries in 29 OECD countries, both EU and non-EU members, adopting a methodology that allows controlling for other determinants of industry market structure common across industries, across countries or related to time passing. The evidence suggests that the overall process of enhanced competition in EU banking markets has lead to markets in non-financial sectors characterized by lower average firm size.

Suggested Citation

Cetorelli, Nicola, Real Effects of Bank Competition (January 2004). FRB of Chicago Working Paper No. 2004-03. Available at SSRN: https://ssrn.com/abstract=505982 or http://dx.doi.org/10.2139/ssrn.505982

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

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