Bank competition, financial reform, and institutions: The importance of being developed

In this paper, I estimate the degree of market power at the bank-level for 84 banking systems worldwide. Subsequently, I analyze the sources of bank competition, placing emphasis on the impact of financial reform and the quality of institutions. I find that financial liberalization policies reduce t...

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Bibliographic Details
Published in:Journal of development economics 2012-03, Vol.97 (2), p.450-465
Main Author: Delis, Manthos D.
Format: Article
Language:English
Subjects:
Bank competition
Bank liquidity
Bank management
Bank operations
Bank regulation
Banking
Banking law
Banking system
Commercial banks
Competition
Competition between banks
Cross-national analysis
Economic policy
Economic reform
Financial reforms
Institutional development
International markets
Market power
Power
Studies
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Summary:In this paper, I estimate the degree of market power at the bank-level for 84 banking systems worldwide. Subsequently, I analyze the sources of bank competition, placing emphasis on the impact of financial reform and the quality of institutions. I find that financial liberalization policies reduce the market power of banks in developed countries with advanced institutions. In contrast, banking competition does not improve at the same pace in countries with weaker institutions and a lower level of institutional development. The results hold across a wide array of identification tests and estimation methods. The main policy implication to be drawn is that a certain level of institutional development is a precondition for the success of reforms aimed at enhancing the competition and efficiency of banking markets.
ISSN:0304-3878
1872-6089
DOI:10.1016/j.jdeveco.2011.05.012