Competition in the Chilean Banking Sector: A Cross-Country Comparison

Abstract

Conventional wisdom tends to associate market concentration with lack of competition, although no conclusive empirical evidence exists linking the two. The concentrated structure of the Chilean banking market has thus raised concerns of insufficient competition in the sector. Media reports in the past often complained that bank lending rates were sluggish in adjust- ing to changes in interest rates, especially following decreases in monetary policy interest rates; the reports linked this finding to insufficient competition in the banking system. The Chilean banking market is indeed relatively con- centrated, and the majority of the banks are owned by a handful of financial conglomerates with significant linkages between the banking, securities, mutual and pension fund management, and insurance businesses. The own- ership linkages are mitigated, however, by firewalls and cross-selling restric- tions across the customer base, which reduce the possibility of realizing economies of scale at the financial conglomerate level.