Implications of the bank merger wave for competition and stability - CGFS conference volume No 2, part 2, October 2002

This paper discusses the effects of bank consolidation on competition and stability in the banking sector. Most empirical literature seems to point towards the standard adverse effects on prices of increased concentration in banking. A major issue is the still regional character of loan and deposit markets for households and small enterprises, which contrasts with the generally increasing globalisation of other financial services. In line with other recent papers, we challenge the view that market power as may be created through banking consolidation is unambiguously good for banking system stability. Various features of bank mergers may actually increase the scope for instability, in particular when they lead to a small number of large “national champions”, monitoring problems, lower money market liquidity or organisational inefficiencies/lack of market discipline. Overall, we stress that competition considerations need to receive adequate attention, even in the special banking sector.