Thoughts on Entry Regulation, Financial Market Competition and Financial Crisis

Seminar paper from the year 2009 in the subject Business economics - Economic Policy, grade: 1,0, University of Frankfurt (Main), course: Financial Regulation, language: English, abstract: This paper deals with the terms entry regulation, financial market competition and also

indicates connections to potential financial crises. Authors in research have been

attempting for years to build up a remedy for an optimal set-up.1

So, this is the reason I observe a seemingly never-ending discussion between two

unofficial parties: Neither the proponents of the concentration-stability view, neither

those of the concentration-fragility view will retreat from how to install proper

competition in order to ensure stability.

This paper also aims to understand the terms of both parties; their arguments and

whether either monopolistic structures or competition are desirable in the financial

industry.

Therefore, I lay the theoretical foundation. I demonstrate with a model of the authors

Boyd & De Nicoló that even economies with monopolistic structure are exposed to

risk-taking activities ¿ and not only banks in competitive industries. In chapter 3, I turn

to the topic ¿Entry Regulation¿. I unveil different yardsticks of entry regulation, reveal

some advantages and draw up my own index. I show that mainly countries that

suffered devastating crises in recent times have stringent entry regulation. This can be

shown by regarding their high capital requirements or their barriers for submitting

information of managers, future plans or composition of shareholders. I also show that

entry regulation is an appropriate means for governments to control or to curb

competition. In the last chapter, it is also shown that high entry capital requirements

prevent mainly weak or inefficient banks from entry.

In chapter 4, I present two ratios for assessing competition: The concentration ratio

(CR) and H-Statistics (H). CR is widely used in literature and defines the market share

of the largest banks in a country. By presenting CR, I also turn back to the argument

between the concentration-stability and concentration-fragility views. Moreover, I do

my part to debilitate the somewhat misleading statement that the European banking

market is in a phase of consolidation and concentration. I do this by revealing that the

concentration ratio slightly decreased in a time span of four years during the current

decade. H-Statistics is a ratio to find out more about the ferocity and contestability of a market and how market participants react to changes in output prices. I show that there

is, maybe surprisingly, no strict correlation between CR and H-Statistics.

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