The Effects of Regulatory Reform on Competition in the Banking Industry

Posted: 26 Oct 2006

See all articles by Paolo Angelini

Paolo Angelini

Bank of Italy

Nicola Cetorelli

Federal Reserve Bank of New York


The paper analyzes the evolution of competitive conditions in the Italian banking industry using firm-level balance sheet data for the period 1984-1997. Regulatory reform, large-scale consolidation and competitive pressure from other European countries have changed substantially the banking environment, with potentially offsetting effects on the overall degree of competitiveness. We find that competitive conditions, relatively unchanged until 1992, improved substantially thereafter, as signaled by the decline in estimated mark-ups. Also, we analyze for the first time the long-run impact of the consolidation process on competition, and find no evidence that banks involved in mergers and acquisitions gained market power; at the same time, they exhibit lower than average marginal costs. Finally, after controlling for various factors that may have determined the time pattern of banks' estimated mark-ups, we still detect a significant unexplained drop in our competitive conditions indicators after 1992. Overall, our evidence is consistent with the hypothesis that the deregulation process, culminated with the implementation of the Second Banking Directive in 1993, significantly contributed to improve bank ompetition, and that it may also have been an important determinant of the consolidation process recorded by the Italian credit system during the nineties.

Keywords: bank competition, mergers and acquisitions, Lerner, consolidation, deregulation

JEL Classification: G21, G34

Suggested Citation

Angelini, Paolo and Cetorelli, Nicola, The Effects of Regulatory Reform on Competition in the Banking Industry. Journal of Money, Credit, and Banking, Vol. 35, No. 5, pp. 663-684, October 2003, Available at SSRN:

Paolo Angelini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Nicola Cetorelli

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5071 (Phone)
212-720-8363 (Fax)


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