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How to gauge the world’s banking markets? Look to the World Bank

How competitive are countries’ banking markets? It’s a complicated question that requires some thought and effort to answer: First, there are several ways to measure competition. One way is to measure the concentration of market shares. But this method isn’t perfect because there may still be substantial competition in a market with few players. Another way is to look at markups—that is, the difference between the price charged and the marginal cost (the cost of one additional produced item). The problem here is that it’s difficult to directly observe those costs, so the costs need to be inferred.

Thankfully, FRED has data that already have the measurements built in: World Bank economists Asli Demirguc-Kunt and Maria Soledad Martinez Peria devised a way to measure banking competition, and the World Bank has published these so-called Lerner indices for a few countries and a few years. The graph above includes competition indices for the U.S., Canada, Switzerland, and the U.K., where smaller numbers indicate more competition. It seems that bank competition in the U.S. is relatively stable, with a slight trend toward less competition. The U.K. seems to endure wild swings, with a similar trend. Smaller countries such as Canada and Switzerland don’t necessarily have less competition due to their smaller market sizes. In fact, the Swiss banking market seems to be even more cut-throat since the Great Recession, likely because some interest rates are negative. The opposite happened in Canada, which hasn’t been affected as much by the previous financial crisis.

How this graph was created: Search for “Lerner index,” select the chosen countries, and click “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: DDOI04CAA066NWDB, DDOI04CHA066NWDB, DDOI04GBA066NWDB, DDOI04USA066NWDB

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