Financial market integration and loan competition: when is entry deregulation socially beneficial?

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Financial market integration and loan competition: when is entry deregulation socially beneficial?

Author Info

Leo Kaas () (Department of Economics, University of Vienna, Hohenstaufengasse 9, 1010 Vienna, Austria.)

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Leo Kaas

Abstract

The 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.

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Paper provided by European Central Bank in its series Working Paper Series with number 403.

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Length: 38 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040403

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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
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository 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)

References listed on IDEAS
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.:

Barros, Pedro Pita, 1995. "Post-entry expansion in banking: The case of Portugal," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 593-611, December. [Downloadable!] (restricted)
Almazan, Andres, 2002. "A Model of Competition in Banking: Bank Capital vs Expertise," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 87-121, January. [Downloadable!] (restricted)
V. Bhaskar & Ted To, 2004. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 762-776, Winter.
Other versions:
- V. Bhaskar & Ted To, 2002. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," Economics Discussion Papers 537, University of Essex, Department of Economics. [Downloadable!]

Full references

Cited by:
(explanations, 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.)

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. [Downloadable!]
Other versions:
- Maria Lehner & Monika Schnitzer, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Discussion Papers 152, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
- Maria Lehner & Monika Schnitzer, 2006. "Entry of Foreign Banks and their Impact on Host Countries," Working Papers 002, Bavarian Graduate Program in Economics (BGPE). [Downloadable!]
- Lehner, Maria & Schnitzer, Monika, 2006. "Entry of Foreign Banks and their Impact on Host Countries," CEPR Discussion Papers 5954, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

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