This paper deals with the terms entry regulation, financial market competition and also
indicates connections to potential financial crises. Authors in research have been
attempting for years to build up a remedy for an optimal set-up.1
So, this is the reason I observe a seemingly never-ending discussion between two
unofficial parties: Neither the proponents of the concentration-stability view, neither
those of the concentration-fragility view will retreat from how to install proper
competition in order to ensure stability.
This paper also aims to understand the terms of both parties; their arguments and
whether either monopolistic structures or competition are desirable in the financial
industry.
Therefore, I lay the theoretical foundation. I demonstrate with a model of the authors
Boyd & De Nicoló that even economies with monopolistic structure are exposed to
risk-taking activities – and not only banks in competitive industries. In chapter 3, I turn
to the topic “Entry Regulation”. I unveil different yardsticks of entry regulation, reveal
some advantages and draw up my own index. I show that mainly countries that
suffered devastating crises in recent times have stringent entry regulation. This can be
shown by regarding their high capital requirements or their barriers for submitting
information of managers, future plans or composition of shareholders. I also show that
entry regulation is an appropriate means for governments to control or to curb
competition. In the last chapter, it is also shown that high entry capital requirements
prevent mainly weak or inefficient banks from entry.
In chapter 4, I present two ratios for assessing competition: The concentration ratio
(CR) and H-Statistics (H). CR is widely used in literature and defines the market share
of the largest banks in a country. By presenting CR, I also turn back to the argument
between the concentration-stability and concentration-fragility views. Moreover, I do
my part to debilitate the somewhat misleading statement that the European banking
market is in a phase of consolidation and concentration. I do this by revealing that the
concentration ratio slightly decreased in a time span of four years during the current
decade. H-Statistics is a ratio to find out more about the ferocity and contestability of a market and how market participants react to changes in output prices. I show that there
is, maybe surprisingly, no strict correlation between CR and H-Statistics.
[...]
Table of Content
1. Introduction
2 .Thoughts on entry regulation and competition
2.1. The impact of bank competition on risk taking
2.2. The new approach of Boyd and De Nicoló
2.2.1 The outcome
2.2.2 Assumptions of Boyd & De Nicoló
2.2.3 Optimisation from the borrowers’ perspective
2.2.4 Interpretation and assessment
3. Entry Regulation
3.1 My own index for entry regulation
3.2 Entry regulation in LDCs and SSACs
3.3 Entry regulation in Europe
3.4 Short summary on entry regulation
4. How to measure competition
4.1 Concentration Ratio and Concentration curve
4.2 Evaluating the meaning of concentration ratios
4.3 The “consolidation and concentration wave”
4.4 Examples for high and low concentration
4.5 H-Statistics
4.6 Coherency between H-Statistics and CR5
5. Final thoughts on entry regulation, competition and risk taking
6. Summary
Research Objectives and Key Topics
This term paper investigates the complex relationship between banking entry regulation, financial market competition, and their potential implications for financial stability and systemic risk. It seeks to analyze whether monopolistic structures or competitive markets are more desirable in the financial industry by evaluating theoretical models, such as the approach by Boyd & De Nicoló, alongside empirical metrics like Concentration Ratios and H-Statistics.
- Theoretical examination of the concentration-stability versus concentration-fragility debate.
- Development of a custom index to assess the stringency of entry regulation across various nations.
- Analysis of bank competition measurement using Concentration Ratios (CR) and Panzar-Rosse H-Statistics.
- Evaluation of the empirical relationship (or lack thereof) between market concentration and competition levels.
Excerpt from the Book
2.2.1 The outcome
Monopoly in banking leads to excessive risk taking due to the fact that borrowers now have the incentive to take excessive risk. This has a connection tied to moral hazard and risk shifting problems. Now, the investment decision is up to the borrower, not the bank.
The borrower has to endure higher rates which imply higher insolvency costs. Well, it is now worthwhile looking into that issue in detail before continuing.
Summary of Chapters
1. Introduction: Outlines the scope of the paper, focusing on the debate between concentration-stability and concentration-fragility views and introduces the methodologies used to analyze entry regulation and competition.
2 .Thoughts on entry regulation and competition: Discusses the impact of bank competition on risk-taking behavior, including the influential model of Boyd & De Nicoló which emphasizes the asset-side perspective of bank risk.
3. Entry Regulation: Explores the purpose of entry barriers and introduces the author's custom index to categorize the stringency of banking entry requirements in different countries.
4. How to measure competition: Examines technical metrics for competition, specifically Concentration Ratios (CR) and the Panzar-Rosse H-Statistic, and evaluates their validity as indicators of market behavior.
5. Final thoughts on entry regulation, competition and risk taking: Synthesizes the findings, arguing that the quality of banking systems matters more than market competition per se, and discusses the role of capital requirements in stability.
6. Summary: Recaps the main theoretical and empirical arguments, concluding that there is no uniform correlation between market concentration and competition, and highlighting that entry regulation remains a critical tool for systemic safety.
Keywords
Entry Regulation, Financial Market Competition, Financial Crisis, Concentration Ratio, H-Statistics, Boyd & De Nicoló, Moral Hazard, Risk-Shifting, Bank Stability, Systemic Risk, Capital Requirements, Banking Sector, Market Concentration, Monopolistic Competition, Banking Supervision
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines how regulations regarding bank entry influence competition and, subsequently, how these market structures affect systemic stability and the likelihood of financial crises.
What are the primary theoretical themes discussed?
The central themes are the competing views of "concentration-stability" (where fewer, large banks are considered more stable) and "concentration-fragility" (where large banks may induce instability), viewed through the lens of moral hazard and risk-shifting.
What is the main objective of the study?
The objective is to understand if monopolistic or highly competitive banking structures are more desirable and to evaluate how different countries regulate entry to maintain market quality.
Which scientific methods and metrics are employed?
The author uses a combination of literature review, the development of a custom entry regulation index, and a comparative analysis of quantitative metrics including Concentration Ratios (CR5) and Panzar-Rosse H-Statistics.
What does the main body of the work cover?
It covers theoretical foundations of banking competition, an assessment of global entry regulations across diverse economic regions, and a detailed critique of metrics used to measure market competition.
Which keywords best characterize the work?
Key terms include Financial Market Competition, Entry Regulation, H-Statistics, Systemic Risk, Concentration Ratio, and Moral Hazard.
What is the significance of the "Boyd & De Nicoló" model mentioned in the paper?
It is significant because it challenges traditional views by highlighting that risk-taking behavior originates from the borrower's perspective on the asset side of the bank balance sheet, not just from the bank's market power.
How does the author evaluate the European banking market?
The author argues that the common perception of a rapid consolidation wave in the European banking sector is misleading, presenting empirical data that shows a slight decrease in concentration ratios between 2001 and 2005.
What does the author conclude about the relationship between CR5 and H-Statistics?
The study concludes that there is no clear, systematic, or statistically significant linear correlation between Concentration Ratios and H-Statistics, suggesting that they measure different aspects of banking markets.
- Quote paper
- Sven Lilienthal (Author), 2009, Thoughts on Entry Regulation, Financial Market Competition and Financial Crisis, Munich, GRIN Verlag, https://www.grin.com/document/124318
