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Measuring Bank Competition: How Should We Do It?

Maria Soledad Martinez Peria's picture

Lack of competition in the banking sector has detrimental effects. Studies have found that it can result in higher prices for financial products and less access to finance, especially for smaller firms. Others have shown that it can lead to the entry of fewer new firms, less growth for younger firms, and delayed exit for older firms. Moreover, while a debate is still under way, new evidence suggests that lack of competition can undermine the stability of the banking sector, especially if some banks become too big to fail.

How to measure bank competition? In a recent paper Asli Demirgüç-Kunt and I propose a multipronged approach. While we apply this framework to Jordan, it can be used to analyze bank competition in any country. In fact, the approach developed in this paper has been used to analyze competition in China, the Middle East and North Africa, and Russia.