Market Power, Liberalization, and Deregulation in the Spanish Banking Sector between 1971 and 2018. New Evidence

This study links the evolution of market power in the Spanish banking sector since 1971 with changes in banking regulation between 1970 and 1990. The main contributions are: 1) An exhaustive chronology of liberalization and deregulation measures in the sector during those years is provided; and 2) Market power is empirically measured for over 40 years using the Lerner Index. A decrease in market power in the 70s was observed, coinciding with increased competition through the branch network, followed by an increase in the 80s, as the liberalization process was affected by the economic cycle. Since 1988, competition intensified with the consolidation of liberalization measures. The results allow for an additional hypothesis in the literature analyzing competition in the Spanish banking sector: There seems to be no evidence that the bulk of deregulation was the trigger per se for rivalry. Rather, it appears that entities anticipated, taking advantage of the imminent changes, and the increase in competition was early. Possibly, it was not the regulatory changes. The latent rivalry between entities took advantage of the opportunities offered by liberalization.