Cross-country comparisons of competition and pricing power in European banking

Studies of banking competition and competitive behavior both within and across countries typically utilise only one of the few measures that are available. In trying to assess the relative competitive position of banking markets in 14 European countries, existing indicators of competition are found to give conflicting predictions across countries, within countries, and over time. This is because indicators of competition tend to measure different things and are additionally influenced by cross-country differences in cost efficiency, fee income levels, real economic growth and inflation. We attempt to separate bank pricing power from these embodied influences and derive more consistent cross-country estimates of banking sector competition. The main result is that our measure of bank pricing power suggests that banking market competition in Europe may well be stronger than implied by traditional measures and analysis.