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Importance of Competition in banking deposits (UK example)

In the 2016 Bank of England report (Measuring Competition ...[Measuring competition in the UK deposit-taking sector | Bank of England] , the authors posits that " Anti-competitive practices and other market failures in banking can have negative consequences for productive efficiency and the cost of finance (Goddard and Wilson, 2004) with implications for consumer welfare and economic growth. Recent studies focus on the way competition can reduce systemic risk (e.g. Schaeck et al., 2009) for which measures of competition are key"...

The analysis indicates that in general, competition was relatively strong in the latter 90's.

What is inferred is that Banks had become smarter in bundling products and that the appearance of competition could be disguised by other loss leaders/ profitable lines.

The report further indicates "However, the deposit-taker business model bundles together activities in several markets simultaneously, so strong competition in some markets can be offset by the extraction of market rents in others. Importantly, competition intensity decreased (and the ability of UK deposit-takers to extract market rents from customers increased) in the period immediately ahead of the financial crisis (2003–07)"

This report emphasises what most of us know and that is the importance to economies and societies of having healthy competition. This analysis was done prior to 2016 and it will be significantly interesting to see how this has changed post Covid.

It has been suggested that each financial crises triggers off a Central Bank response that in my opinion provides temporary relief and inevitably leaves more inequality and that is why competition must be fostered and cultivated especially in the increasingly dominant financial sector. Bank deposits is a critical area to keep under the spotlight.

Source: Staff Working Paper No. 631 Measuring competition in the UK deposit-taking sector Sebastian J A de-Ramon and Michael Straughan December 201

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