Financial market integration and loan competition: when is entry deregulation socially beneficial?
AbstractThe paper analyzes how the removal of barriers to entry in banking affect loan competition, bank stability and economic welfare. We consider a model of spatial loan competition where a market that is served by less efficient banks is opened to entry by banks that are more efficient in screening borrowers. It is shown that there is typically too little entry and that market shares of entrant banks are too small relative to their socially optimal level. This is because efficient banks internalize only the private but not the public benefits of their better credit assessments. Only when bank failure is very likely or very costly, socially harmful entry can occur. JEL Classification: D43, D82, G21
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0403.
Date of creation: Nov 2004
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Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-04 (All new papers)
- NEP-COM-2005-10-04 (Industrial Competition)
- NEP-ENT-2005-10-04 (Entrepreneurship)
- NEP-FIN-2005-10-04 (Finance)
- NEP-FMK-2005-10-04 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Entry of Foreign Banks and their Impact on Host Countries,"
CEPR Discussion Papers
5954, C.E.P.R. Discussion Papers.
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- Lehner, Maria & Schnitzer, Monika, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Discussion Papers in Economics 1208, University of Munich, Department of Economics.
- Lehner, Maria & Schnitzer, Monika, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 152, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Maria Lehner & Monika Schnitzer, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Working Papers 002, Bavarian Graduate Program in Economics (BGPE).
- Maudos, Joaquin & Fernandez de Guevara, Juan, 2006. "The cost of market power in banking: social welfare loss vs. inefficiency cost," MPRA Paper 15253, University Library of Munich, Germany.
- Christoph Walkner & Jean-Pierre Raes, 2005. "Integration and consolidation in EU banking - an unfinished business," European Economy - Economic Papers 226, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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