Handbook of Competition in Banking and Finance
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Handbook of Competition in Banking and Finance

Edited by Jacob A. Bikker and Laura Spierdijk

For academics, regulators and policymaker alike, it is crucial to measure financial sector competition by means of reliable, well-established methods. However, this is easier said than done. The goal of this Handbook is to provide a collection of state-of-the-art chapters to address this issue. The book consists of four parts, the first of which discusses the characteristics of various measures of financial sector competition. The second part includes several empirical studies on the level of, and trends in, competition across countries. The third part deals with the spillovers of market power to other sectors and the economy as a whole. Finally, the fourth part considers competition in banking submarkets and subsectors.
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Chapter 13: Shadow banking and competition: decomposing market power by activity

Daniele Titotto and Steven Ongena

Abstract

The term “shadow banking” refers to credit intermediation performed outside the regulated perimeter of traditional lenders. Banks, however, do play a significant role in it. The authors review the origins and characteristics of the shadow banking system, investigate how banks control various steps of the securitization process, and analyze the nexus with competition. They use a double-output formulation of the Lerner index to disentangle the market power of lending and non-traditional activities. They find important differences in the two indicators, consistently with the common narrative. The market power related to non-traditional activities is both larger in magnitude and more pro-cyclical than that estimated for traditional lending. The authors’ findings suggest that banks might engage in less traditional business lines to alleviate the competitive pressure borne on core activities.

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