. Consider two counties with the following characterizes. Country A has no restrictions on bank branching and banks in Country A are permitted to offer investment and insurance product along with traditional banking services. In Country B, there are strict limits on branch banking and on the geographical spread of a bank’s business. In additional, banks in banks B are not permitted to offer investment or insurance services.
A. In which country did you think the banking system is more concentrated?
B. In which country did you think the banking system is more competitive?
C. In which country did you think, everything else being equal, banking products are cheaper?
Explain your choices
7 Answers | Add Yours
Country A by its very nature will have more restricted banking and regulations. It will be difficult, if not impossible, to manage your finances without being at the mercy of the state-controlled banking system; with no other options, such as local credit unions, investment and other transactions will be monitored by a central office and subject to arbitrary fees. At the cost of easily-accessed branch banks, Country B will have more competition, allowing the customer to choose the best option.
As other editors have noted, it depends a lot on the level of government regulation of the banking systems. On the surface it looks very much as if scenario A would create a more competitive banking system and cheaper banking for consumers because of the relative freedom that they enjoy.
Banking, like any other industry, benefits from level competition, which makes the industry more efficient and more beneficial to the consumer. Whatever governmental regulations exist should be in place to minimize fraud and monopolistic practices.
I agree with the above posts that country A would probably have the most competitive banking system and thus the lowest prices. This would be especially the case if there were strong anti-monopoly and anti-price-fixing regulations. If the government functioned to ensure as much competition as possible, country A would greatly benefit.
There is a big question that is left unaddressed that can change everything. How closely does the government monitor and what kind of incentives are offered to the banks? With this stated, let me address your second question (B). Since there are many branches and banks in country A, these banks will have to cater to the public more. For this reason, these banks will have to compete more.
Country A will have a more concentrated system in the sense that more of its bank branches will be controlled by large banks. This should lead to that country having lower prices because there would be a great deal of competition among banks that are trying to gain market share nationwide. In Country B, there would be more expensive local banks with less competition and fewer economies of scale.
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