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Competition and Stability: What's Special about Banking?

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  • Philipp Hartmann
  • Elena Carletti

Abstract

This paper examines the relationship between competition policies and policies to preserve stability in the banking sector. Market structures and the relative importance of the three classical antitrust areas for banking are discussed, showing the predominance of merger review considerations for loan and deposit markets as well as the relevance of cartel considerations for payment systems. A core part of the paper is an analysis of the relative roles of competition and supervisory authorities in the review of bank mergers for the G-7 industrialised countries. A wide variety of approaches emerges, with some countries giving a stronger role to prudential supervisors than to competition authorities and other countries doing it the other way round. In search for explanations for this diversity the theoretical and empirical literature on the competition-stability nexus in banking is surveyed. It turns out that the widely accepted trade-off between competition and stability does not generally hold.

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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Special Papers with number sp140.

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Date of creation: Apr 2002
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Handle: RePEc:fmg:fmgsps:sp140

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  1. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  2. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
  3. Benston, George J & Hunter, William C & Wall, Larry D, 1995. "Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 777-88, August.
  4. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  5. Wilko Bolt & Alexander F. Tieman, 2004. "Banking Competition, Risk and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 783-804, December.
  6. Elena Carletti, 1999. "Bank Moral Hazard and Market Discipline," FMG Discussion Papers dp326, Financial Markets Group.
  7. Michael D. Bordo & Hugh Rockoff & Angela Redish, 1996. "A Comparison of the United States and Canadian Banking Systems in the Twentieth Century: Stability vs. Efficiency?," NBER Working Papers 4546, National Bureau of Economic Research, Inc.
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