Competition in banking

Published on January 31, 2016   23 min
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Hello, I am Claudia Girardone, I am professor of banking and finance at the Essex Business School of the University of Essex. Today's lecture is about competition in banking. The aims of this lecture are to appreciate the benefits of composition in the banking sector, to understand how to measure bank competition levels, to explain the link between competition and bank stability.
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The main reference for this lecture is the Casu, Girardone, Molyneux 2015 edition of the Introduction to Banking by Pearson Education. Well, we start off by giving an introduction and then focusing on the structural approaches to measuring competition.
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Competition is good for many reasons. Competition is generally considered an essential force in the economy as it should encourage firms to be more efficient in the way they produce outputs and consequently promote a better allocation of resources. In the banking industry, higher efficiency should entail lower costs, which should then be passed onto bank customers. How does this happen? In the form of lower charges, higher deposit rates and reduced lending costs.
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So why is competition in banking markets important? Competition should have a positive impact on the economy, influencing a broad array of factors that can, for example, improve access to finance, increase competitiveness in other sectors of the economy, foster innovation and improve the quality of products and services offered, widen consumer choice, and promote economic growth. A healthy degree of rivalry is considered necessary for the dynamic efficiency of the banking industry and for the economy as a whole. However, we need to keep in mind that the issue of the perceived benefits derived from increased competition has always been controversial in banking as these have to be weighted against the risks of potential instability. As a consequence, the banking industry has been historically heavily regulated.