Competition and Regulation in the Banking Sector: A Review of the Empirical Evidence on the Sources of Bank Rents
Handbook of Financial Intermediation and Banking
We combine recent findings from the empirical banking literature with established insights from studies of banking competition and regulation. Motivated by modern theory of financial intermediation we center our review on the various sources of bank rents. We start with a concise overview and assessment of the different methodological approaches taken to address banking competition. We then structure our discussion of the empirical findings based upon a framework that finds its roots in the
... ts roots in the different theories of financial intermediation. We categorize and assess the many empirical findings in the literature on competition in banking. We focus on market structure, switching costs, location, and regulation. Our review highlights that more concentrated markets are associated with significant spreads in both deposit markets and loan markets. Fiercer competition lowers spreads, but may also spur banks to tie customers in relationships that possibly encompass more fee related products and cross-selling. Relationships shield rents, providing an explanation for the steep growth in fee income sought by the banks. Relationship duration seems not uniformly linked to higher loan spreads, though loan fees and the pricing of other products may be important and missing in those studies finding a negative correspondence. The few studies that focus on location as a source for bank rents find that close borrowers pay a higher loan rate. The effects of distance on credit availability on the other hand seem small. Though distance effects on branch efficiency seem minimal, distance constrains lending to informationally difficult but sound firms. To cross national borders to engage new customers or to merge with another bank continues to be an adventurous endeavor. Finally, regulation continues to be a fine source of rents for banks in many countries.