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Bank competition, financial reform and institutions: The importance of being developed

Delis, Manthos D (2010): Bank competition, financial reform and institutions: The importance of being developed.

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Abstract

In this paper we estimate the degree of market power at the bank-level for 84 banking systems worldwide. Subsequently, we analyze the sources of bank competition, placing emphasis on the impact of financial reform and the quality of institutions. We find that financial liberalization policies reduce the market power of banks in developed countries with advanced politico-institutional milieus. In contrast, banking competition does not improve at the same pace in countries with weaker institutions and a lower level of economic development. The results hold across a wide array of identification tests and estimation methods. The main policy implication to be drawn is that a certain level of institutional maturity is a precondition for the success of reforms aimed at enhancing competition and efficiency of banking markets.

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