What Drives Bank Competition? Some International Evidence

34 Pages Posted: 29 Feb 2004

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Stijn Claessens

Bank for International Settlements (BIS)

Date Written: August 6, 2003

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

Suggested Citation

Laeven, Luc A. and Claessens, Stijn, What Drives Bank Competition? Some International Evidence (August 6, 2003). World Bank Policy Research Working Paper No. 3113. Available at SSRN: https://ssrn.com/abstract=509605

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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