Nowadays, the banking industry has become significantly more competitive than in the past and competition is likely to increase further. New competitive pressures are emerging from abroad, owing to the liberalization of international banking and capital flows, and as a result of the adoption of new banking technologies. However, there are some limits resulting from the particular characteristics of the banking system. The word "system" is the key because it emphasizes the natural element existing among banks, which form the core of the monetary system, channeling liquidity to the other participants of the financial system and managing the payments traffic in the economy. Moreover, the public policy response to the question of whether competition among banks is good or bad has changed profoundly into viewing competition as predominantly positive since the mid 1970s.
[...] Others banks participate in a strong competition to increase their market shares by tightening margins of the loan rates proposed to the customers. In this case, competition leads to lower credit offers. Selling at a loss is a practice that must be prohibited because it can lead to a destructive competition. Although the customers think that this type of interest rate-decreasing competition makes borrowing easier for them, the threat of losses and difficulties for banks is harmful for the whole banking industry. To conclude, we can say that it is quite difficult an enterprise to analyze competition in the banking industry. [...]
[...] But, the most important aspect to analyze is to control whether the particular policies of competition in banking, such as cartels, mergers or dominant position, are anti-competitve or not. If one of such prohibited situations may appear in the market, it is compulsory to rectify it in order to protect both customers and banks and on the other hand competiton as a whole. These practices can be allowed to the extent that they do not lessen competition in the banking industry but it is obvious to limit them. Bibliography Le secteur Bancaire et la Concurrence, éditions Émile Bruylant, Collection cahier AEDBF/EVBFR Belgium L. SCIALOM, Économie Bancaire, éditions [...]
[...] More theoretically, we can describe an idealistic competitive market by no transaction costs, the impossibility for individuals to affect prices, the fact that everyone knows everything that can be known and that anything is insurable. All these aspects are also applicable to the banking market where competition is expected not to affect interest rates and clients are expected to know everything about the banking market they are facing. Just as we mentionned in the introducing part of this report, competition can also have some negative consequences on the banking industry. II - Negative effects of competition in the banking industry In reality, competition in banking is often criticized for having negative effects among banks. [...]
[...] I - Positive effects of competition in the banking industry Competition in banking can be beneficial for the clients. Indeed, the bank industry must be considered by the same way we consider any other industries. Every client is specific because he has his own needs in terms of banking demand, which are different from another one's. In this case, competition is a good means to diversify the supply among banks. A banking product does not exist, it is a group of characteristics such as a remunerated account or not, with banking charges or not, other banking services or not etc. [...]
[...] III Control and limits to impose to competition in banking The idealistic view of a perfect competition in the banking system is often forgotten. Indeed, in the banking market the invisible hand assumptions are often violated. This phenomenon is called market failure to the extent that demand and supply do not join freely. Some policies in the banking market can be used by an excessive way leading to anti-competitive practices. These practices are nevertheless prohibited. When it comes to the different types of business practices, competition in banking has to be strictly controlled and even prohibited to avoid any anti-competitive situations in the market. [...]
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