Should the Banking Sector be Exempted from the Enforcement of Competition Law due to Concerns about Instability?

One of the most controversial topics in banking literature is the relationship between competition and stability in the banking sector. The preliminary studies suggest that banks are more vulnerable than the firms operating in other sectors, thus intense banking competition can cause fragility. However, other studies in a more recent strand of literature oppose it and argue that fiercer competition will not necessarily destabilize the banking sector. In 2013, Turkish Competition Board decided that the largest banks operating in the sector set interest rates together in the form of cartel, and thus imposed its record fine on them. Using the invaluable findings of the Board in its decision on the exact timing of the violation, we have empirically examined the relationship between competition and stability in the Turkish loan market. To this end, the study utilized the popular Difference-in-Differences (DiD) approach, which is used in the social sciences to estimate the differential effects of a factor/event called “treatment” on a “treatment group” compared to a “control group”. The results show strong evidence in favor of the competition-stability hypothesis: With the formation of the cartel between deposit banks, non-performing loan rates of almost all deposit bank segments increased very significantly. This means that Turkish deposit banks do not distribute loans to more risky customers during periods of intense competition, or alternatively that severe competition does not result in more defaults by borrowers. In conclusion, one may confidently claim that the banking sector does not have a special privilege from the perspective of stability, and thus recommend that the Competition Board apply competition rules to the banking sector without any hesitation and limitation.