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Imperfect Information and Monopolistic Pricing in the Banking Industry

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  • Enzo Dia

    (Department of Economics, University of Milan-Bicocca and University of Strathclyde)

Abstract

We critically discuss recent developments in the theory of banking, focusing on the two set of services that banks jointly provide: payment services by means of bookkeeping transactions and financial intermediation services. The limitation of the available information, of the capabilities of the human mind, and of the available time of any individual, produce relevant departures from the basic assumptions of perfectly competitive markets, creating the need for institutions such as banks. It can be shown that market forces can be very effective in assuring contractual performance in the banking industry, reducing the need of generalised legal restrictions. Besides, taking into account the peculiarities of contemporary banking institutions, credit rationing seems to be a far less significant phenomenon. The main conclusion of the analysis is that the focus of many current regulations of the banking system, in continental Europe in particular, is misplaced. The current regulatory framework produces too many distortions in market prices and the allocation of resources, and regulations impose a heavy burden on taxpayers. On the contrary, the more fundamental causes of instability are not properly addressed by the current legal requirements.

Suggested Citation

  • Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
  • Handle: RePEc:mib:wpaper:74
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