A new approach to measuring competition in the loan markets of the euro area

TLDR

This approach can measure competition of bank market segments such as the loan market, unlike many measures that only consider the entire banking market, but it ignores differences in product quality, design, and innovation attractiveness. This article is the first to apply the Boone indicator, a new competition measure, to the banking industry. Competition was measured on lending markets in the five major EU countries and, for comparison, the UK, US, and Japan. From 1994 to 2004 the US had the most competitive loan market, Germany and Spain were among the best in the EU, the Netherlands was intermediate, Italy saw a significant decline, and France, Japan, and the UK were generally less competitive.

Abstract

This article is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Our findings indicate that over the period 1994–2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive.