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Ownership Concentration and Competition in Banking Markets

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  • Alexandra Lai
  • Raphael Solomon

Abstract

Many countries prohibit large shareholdings in their domestic banks. The authors examine whether such a restriction restrains competition in a duopolistic loan market. Blockholders may influence managers' output decisions by choosing capital structure, as in Brander and Lewis (1986). For the blockholder, debt has an additional benefit: it "disciplines" a manager by reducing the amount of free cash flow from which the manager can divert funds. A larger blockholder can exert more control. The authors show that an economy with blockholders often leads to a more competitive banking sector. Hence, a restriction on the size of blockholdings has anti-competitive results.

Suggested Citation

  • Alexandra Lai & Raphael Solomon, 2006. "Ownership Concentration and Competition in Banking Markets," Staff Working Papers 06-7, Bank of Canada.
    • Handle: RePEc:bca:bocawp:06-7
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    References listed on IDEAS

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    Cited by:

    1. Pursey Heugens & Marc Essen & J. Oosterhout, 2009. "Meta-analyzing ownership concentration and firm performance in Asia: Towards a more fine-grained understanding," Asia Pacific Journal of Management, Springer, vol. 26(3), pages 481-512, September.
    2. Thorsten V. Koeppl & James MacGee, 2007. "Branching Out: The Urgent Need to Transform Canada’s Financial Landscape and How to Do It," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 251, June.

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    More about this item

    Keywords

    Financial institutions; Financial services; Financial system regulation and policies;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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