DP373 Banking Competition and European Integration

Author(s): Xavier Vives
Publication Date: April 1990
Keyword(s): Banking, Deregulation, European Integration
JEL(s): 312, 314, 423, 611, 619
Programme Areas: Applied Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=373

We assess how banking competition will be affected by the process of deregulation and integration in European financial markets, drawing on the lessons of recent research in finance, banking and industrial organization. Our central thesis contends that the main effect of integration will be to change the focus of banks' strategic behaviour from collusion and regulatory capture to competition. Nevertheless, competition will be imperfect due to the presence of significant economic barriers to entry, and this means that the upper bound for the benefits of integration is lower than the competitive benchmark. In consequence, integration will not have an impact as large as that associated with competitive or `contestable' outcomes. The analysis suggests that European banks will seek to offset the increased competition brought about by 1992 by engaging in mergers, acquisitions and cross-participation agreements. Furthermore, different degrees of competition will coexist in a segmented market and the benefits of integration will be unevenly distributed.