Competition issues in European banking

Date08 May 2009
DOIhttps://doi.org/10.1108/13581980910952568
Published date08 May 2009
Pages119-133
AuthorBarbara Casu,Claudia Girardone
Subject MatterAccounting & finance
THEMED PAPER
Competition issues
in European banking
Barbara Casu
Cass Business School, City University London, London, UK, and
Claudia Girardone
Essex Business School, University of Essex, Colchester, UK
Abstract
Purpose – The purpose of this paper is to assess the outcome of European Union (EU) deregulation
and competition policies on the competitive conditions of the main EU banking markets.
Design/methodology/approach – After a review of deregulation and competitition policies in the
EU banking industry, the degree of competition in the largest five EU banking markets using is
tessted both structural (concentration ratios and Herfindahl-Hirshman indices) and non-structural
(H-statistics and Lerner index) approaches.
Findings – Results indicate that EU banking markets are becoming progressively more concentrated
and that there is no evidence of an increase in competitive pressure. Country differences are also
apparent thereby indicating that despite the sustained regulatory interventions, significant barriers
to the integration of EU retail banking markets remain. In line with recent literature, the analysis also
seems to provide further evidence that concentration is not necessarily a good proxy for competition.
Originality/value – Increased market concentration and its effects on competition are of relevance
in a period of renewed EU regulatory efforts to remove the remaining barriers to the integration of
financial markets. The evaluation of competitive conditions and market power in EU banking are
therefore of interest to policy-makers and regulators.
Keywords Competitive strategy, Banking, Regulation,Financial markets, Europe
Paper type Research paper
1. Introduction
Competition is generally considered a positive force in most industries; it is supposed
to have a positive impact on an industry’s efficiency, quality of provision, innovation
and international competitiveness. However, this issue has always been controversial
in banking, as the perceived benefits derived from increased competition have to be
weighted against the risks of potential instability. As a consequence, the banking
industry has been historically heavily regulated. Furthermore, the existence of fric tions
in banking markets (for example, entry barriers and asymmetric information), cause
the welfare theorems associated with perfect competition not to be directly applicable
and allow room for the exercise of market power (Vives, 2001). Nevertheless, a healthy
degree of rivalry is considered necessary for the dynamic efficiency of an industry and
this principle is at the basis of the trend towards fostering greater competition in
banking markets all over the world.
In the European Union (EU), in particular, the past 20 years saw substantial
deregulation of financial services, together with the establishment of the Economic and
Monetary Union (EMU) and the introduction of the euro. These changes were aimed at
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
European
banking
119
Journal of Financial Regulation and
Compliance
Vol. 17 No. 2, 2009
pp. 119-133
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910952568

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