Anticompetitive regulations in the banking sector inhibit economic growth. That is the conclusion of Pieter IJtsma based on research into the effects of deregulation in the United States banking sector on economic growth in the period between 1970 and 2000. He demonstrates that deregulation leads to positive spill-over effects in that the surrounding states also profit from the reduction in restrictive regulations.
‘My findings are relevant to Europe’, says IJtsma. ‘Compared to the US, where banks operate nationally, the European banking sector is rather segmented. I advocate a more European market. Although the regulations have largely disappeared, it is still difficult for Dutch SMEs to apply for a loan from a French bank. Removing that geographical restriction is likely to have a positive effect on economic growth.’
IJtsma also studied to what extent an increase in market concentration in the EU banking sector has affected the financial stability of the sector. He demonstrates that the increased concentration has hardly affected either the individual stability of banks or the stability of the financial sector as a whole.
‘This means that saving banks during financial crises by means of mergers may be an attractive alternative to doing so through government support’, says IJtsma. Government support for ailing banks could trigger undesirable behaviour by banks, so bail-outs should be the exception rather than the rule. Having demonstrated that increased market concentration as a result of mergers seems to have no detrimental effects on the stability of the sector, it is preferable to let healthy banks take over ailing banks.
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