What Drives Bank Competition? Some International Evidence

Abstract

Using bank-level data, Claessens and Laeven apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries' banking systems. They then relate this competitiveness measure to indicators of countries' banking system structures and regulatory regimes. The authors find systems with greater foreign bank entry and fewer entry and activity restrictions to be more competitive. They find no evidence that the competitiveness measure negatively relates to banking system concentration. Their findings confirm that contestability determines effective competition, especially by allowing (foreign) bank entry and reducing activity restrictions on banks.

This paper - a product of the Financial Sector Operations and Policy Department - is part of a larger effort in the department to study competition in the financial sector.

Keywords: Banking, competition, contestability, Panzar and Rosse

JEL Classification: D4, G21, L11, L80, O16