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Competition in the banking industry

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  1. Report written by Benoit BALESTA.
  2. The effects of competition.
    1. Positive effects of competition in the banking industry.
    2. Negative effects of competition in the banking industry.
    3. Control and limits to impose to competition in banking.
  3. Conclusion.
  4. Bibliography.

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 [...]

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