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Is Banking a Natural Monopoly?

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  • Dowd, Kevin

Abstract

This paper reviews the arguments behind claims that banking is a natural monopoly. There are economies in reserve-holding and asset diversification, but the marginal return to scale tends to fall as the bank grows, and there is not particular reason to expect these economies to be large enough to produce a natural monopoly. The paper then examines three spurious arguments for natural monopoly--the arguments (1) that competitive note issue would lead to inflation, and that economies of (2) standardization and (3) "confidence" make banking a natural monopoly. The first argument presupposes that competition has already been suppressed, the second is not a natural monopoly argument at all, and the third suffers from other drawbacks. The conclusion that banking is not a natural monopoly is supported by the evidence from historical banking systems and by a large volume of empirical work on economies of scale in banking. Copyright 1992 by WWZ and Helbing & Lichtenhahn Verlag AG

Suggested Citation

  • Dowd, Kevin, 1992. "Is Banking a Natural Monopoly?," Kyklos, Wiley Blackwell, vol. 45(3), pages 379-392.
  • Handle: RePEc:bla:kyklos:v:45:y:1992:i:3:p:379-92
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    Cited by:

    1. Doris Neu Berger, 1998. "Industrial Organization of Banking: A Review," International Journal of the Economics of Business, Taylor & Francis Journals, pages 97-118.
    2. Eleni Dalla & Erotokritos Varelas, 2013. "Monetary Policy and the Behavior of a Monopolistic Bank: A Theoretical Approach," Asian Economic and Financial Review, Asian Economic and Social Society, pages 1439-1450.

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