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Banking competition and macroeconomic performance

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Title Banking competition and macroeconomic performance
Period 12 / 2012 - 12 / 2017
Status Current
Research number OND1348615
Data Supplier NWO

Abstract

The current financial and economic crisis has sharply highlighted the crucial position of banks in the economy. Banks play a central role in the provision of credit, the payment system, the transmission of monetary policy and in maintaining financial stability. The crisis has resulted in an ongoing debate about the need to restructure the banking industry. Substantial banking reforms are widely considered necessary to create a healthy banking sector and to avoid a new crisis in the future. There are two opposite views in the debate about reshaping the banking sector. Some argue that intensified competition will force banks to engage in riskier operations to boost profit margins, thereby increasing the risk of bank failure. They therefore advocate a strongly regulated banking industry with restrictions on the degree of competition between banks. Others believe that increased banking competition will lead to social welfare gains for both consumers and firms and therefore promote a more liberalized banking industry. This research project will contribute to the discussion about the restructuring of the banking industry in two fundamental ways. The first part of this project will develop a new empirical method to assess banking competition, which is more accurate and informative than existing methods. Clearly, methods for accurate measurement of banking competition are of eminent importance in the discussion about reshaping the banking sector. The second part of the project will empirically analyze the impact of banking competition on economic growth and financial stability in the EU and the US, making use of the method developed in the first part of the project. The empirical results regarding the relation between banking competition and macroeconomic performance will be highly relevant for bank regulators, governments and other policymakers that are involved in the restructuring of the banking industry.

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Project leader Prof.dr. L. Spierdijk

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