DP4000 | What Drives Bank Competition? Some International Evidence

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Using bank-level data, we apply the Panzar and Rosse (1987) methodology to estimate the extent to which changes in input prices are reflected in revenues earned by specific banks in 50 countries? banking systems. We then relate this competitiveness measure to indicators of countries? banking system structures and regulatory regimes. We find systems with greater foreign bank entry, and fewer entry and activity restrictions to be more competitive. We find no evidence that our competitiveness measure negatively relates to banking system concentration. Our findings confirm that contestability determines effective competition, especially through allowing (foreign) bank entry and reducing activity restrictions on banks.