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A Note on Contestability in the Canadian Banking Industry

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Author Info

  • Jason Allen
  • Ying Liu

Abstract

The authors examine the degree of contestability in the Canadian banking system using the H-statistic proposed by Panzar and Rosse (1987) and modified by Bikker, Spierdijk, and Finnie (2006). A modification is necessary because the standard approach of controlling for size using total assets leads to an upward bias in the H-statistic. The authors propose a variety of model specifications and test for contestability using detailed quarterly balance-sheet data from 2000 to 2006. Contrary to Bikker, Spierdijk, and Finnie (2006), the authors find that the Canadian banking sector is in equilibrium and characterized by monopolistic competition. This result is in line with earlier studies of the Canadian banking sector (Nathan and Neave 1989) as well as cross-country studies that use cruder measures of Canadian banking inputs (Claessens and Laeven 2005). As in Bikker, Spierdijk, and Finnie (2006), the authors show that projecting revenue on total assets leads to an upward bias regarding the level of competition.

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File URL: http://www.bankofcanada.ca/en/res/dp/2007/dp07-7.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Discussion Papers with number 07-7.

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Length: 23 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocadp:07-7

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Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

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Keywords: Financial institutions;

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Cited by:
  1. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers 09-13, Bank of Canada.
  2. Rezitis, Anthony N., 2010. "Evaluating the state of competition of the Greek banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 68-90, February.

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