A Note on Contestability in the Canadian Banking Industry

Bank of Canada discussion papers are completed research studies on a wide variety of technical subjects relevant to central bank policy. The views expressed in this paper are those of the authors. No responsibility for them should be attributed to the Bank of Canada. Abstract The authors examine the degree of contestability in the Canadian banking system using the H-statistic proposed by Panzar and Rosse (1987) and modified by Bikker, Spierdijk, and Finnie (2006). A modification is necessary because the standard approach of controlling for size using total assets leads to an upward bias in the H-statistic. The authors propose a variety of model specifications and test for contestability using detailed quarterly balance-sector is in equilibrium and characterized by monopolistic competition. This result is in line with earlier studies of the Canadian banking sector (Nathan and Neave 1989) as well as crosscountry studies that use cruder measures of Canadian banking inputs (Claessens and Laeven 2005). As in Bikker, Spierdijk, and Finnie (2006), the authors show that projecting revenue on total assets leads to an upward bias regarding the level of competition. Spierdijk et Finnie (2006), les auteurs montrent que le fait d'employer pour variable dépendante le ratio du revenu à l'actif total entraîne une surestimation du niveau de concurrence.