An Investigation into the Economics of Extending Bank Powers

Policy-makers in many countries earnestly debate the extent of powers that commercial banks should be allowed. In contrast, some economists declare such a debate futile. Commercial banks should be allowed all powers, and competition will ensure they will adopt only those ones that they can perform competently. In other words, they argue, so long as competition is not arti ficially restricted, efficient institutions will emerge. This paper shows that unrestricted competition does not necessarily lead to efficient institutions if the markets in which institutions compete are not naturally competitive. Therefore, the debate on what powers banks should have is relevant even from an efficiency point of view. More evidence is needed to convince policy- makers, especially in developing countries.