Wednesday, May 13, 2009

Bank Competition Promotes Financial Stability

When I worked with the Central Bank of Brazil, I was one among the few that defended policies that promoted bank competition. Unfortunately however a sizeable share of policymakers in central banks and finance ministries around the world adhere to the bizarre notion that bank concentration is good for financial stability and for a nation's economic performance.

Those policymakers in Europe and Latin America, and recently in the US too, will probably want to read this article in the The Economist, which shows that they're most surely wrong. Here's a relevant passage:

The harm that consumers may suffer from a lack of competition seems clear. A study published in 2004 by the Bank of England found, unsurprisingly perhaps, a clear correlation between market share and pricing by banks. The bigger their share of the nation’s cheque accounts, the less they paid customers on deposits and the more they charged them for loans. ...

In a paper last year for the World Bank, Thorsten Beck argued that most recent international comparisons of banking systems have found that the more competitive ones are also more stable. More importantly, they seem to show that when foreign banks enter markets they increase both competition and the stability of the system. Similarly, a study for the IMF published in 2006 that looked at 38 countries found that more competitive banking systems were less prone to systemic crisis.

No comments: