Edited by Adrian R. Bell, Chris Brooks and Marcel Prokopczuk
Chapter 8: Competition in banking: measurement and interpretation
Competition in banking is important because it encourages efficiency in the production and allocation of financial services. In banking, the level of competition has implications for access to finance, the allocation of capital funds, the competitiveness and development of manufacturing and service sectors, the level of economic growth and the extent of financial stability (Petersen and Rajan, 1995; Cetorelli, 2004; Bonaccorsi Di Patta and Dell’Aricca, 2004; Beck et al., 2004). Competition can make markets more competitive by encouraging innovation, lower prices and higher-quality products to enhance consumer choice and welfare. Given the importance of bank competition, it is crucial that researchers find precise ways of assessing not only the level of competition at a given moment in time, but also changes in competition over a sustained period. The more accurate the measure, the more precise any predictions of econometric models utilized are likely to be. Any policy measures following from such predictions can be misleading if the extent of competition measured is inaccurate.
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