The Competitive Challenge in Banking

42 Pages Posted: 10 Nov 2005

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Anjolein Schmeits

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Abstract

The increasingly competitive environment poses challenges to bankers. This paper emphasizes relationship banking as a prime source of the banks' comparative advantage. The proliferation of transaction-oriented banking (trading and financial market activities) does however seriously challenge relationship banking. Competition from financial markets may well destabilize (traditional) durable relationships. However, we argue that, contrary to what many believe, banks may optimally respond by increasing relationship-specific investments. These observations echo the insights generated by fundamental research in the area of financial intermediation, and seem consistent with banks' recent strategic choices. We subsequently analyze the implications for the competitive positioning of banks. To this end, we discuss the rationales and empirical evidence regarding the recent consolidation and conglomeration trend in the financial sector, and the implications for both the industrial structure and the optimal internal organization of banks. We also discuss the potential disaggregation of the value chain via joint ventures or outsourcing.

Keywords: Relationship and transaction-oriented banking, competition, conglomeration, strategy

JEL Classification: G20, G21

Suggested Citation

Boot, Arnoud W. A. and Schmeits, Anjolein B., The Competitive Challenge in Banking. Amsterdam Center for Law & Economics Working Paper No. 2005-08, Available at SSRN: https://ssrn.com/abstract=841285 or http://dx.doi.org/10.2139/ssrn.841285

Arnoud W. A. Boot (Contact Author)

University of Amsterdam - Amsterdam Business School ( email )

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Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Anjolein B. Schmeits

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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