Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Scientific Monographs, Bank of Finland

No E:20/2000:
Technological Transformation and Retail Banking Competition: Implications and Measurement

Jukka Vesala ()

Abstract: The study analyses the effects on banking competition of the changes in banking delivery and information collection technologies and of the rivalry from outside the traditional banking sector. Key implications for monetary, regulatory and competition policies are also addressed.

Evidence is provided that liberalization increased banking competition in Europe. In a mostly deregulated environment, technology is argued to be of major importance for competition. The study argues against the prevalent spatial modelling of banking competition due to the difficulty of representing remote access and nonbank activity. Instead, a novel two-stage model (delivery capacity, then loan and deposit pricing decisions) is developed based on multidimensional differentiation theory. According to the results, benefits that clients derive from branch or ATM proximity, additional outlets, or superior service quality can maintain pricing power for banks. Technological development reduces these benefits and generates a permanent increase in competition. The optimal sizes of branch and ATM networks decline. Network cooperation reduces network sizes, but is not necessarily harmful, as price competition is stimulated.

An empirical implementation of the model is presented for the Finnish loan and deposit markets. Banks’ pricing power is found to be entirely due to their branch network differentiation and size in the loan markets, and to exist mainly in household lending. In contrast, price coordination was found to likely characterize deposit pricing. The ability to distinguish differentiation from collusion is a new contribution. Banks’ pricing advantages were found to be diminishing in all lending and especially deposit-taking activities, following the technological development, which indicates reduced significance of branches for clients.

Technological development, growing nonbank activity, deepening capital markets and weakening price coordination are found to enhance the efficiency of monetary policy transmission into lending (and deposit) rates. The results are relevant for the common euro area monetary policy, since they show the dependence of the transmission on particular structural and competitive conditions of the banking system. Finally, deregulation of deposit interest rates insulates loan rates from changes in deposit rates and, contrary to what is often argued, does not make loans more costly.

Keywords: banking competition; technological change; delivery networks; monetary policy efficiency; competition policy; (follow links to similar papers)

209 pages, December 29, 2000

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

E20.pdf    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Päivi Määttä () or Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofism:2000_020 This page was generated on 2014-12-14 19:21:12