Measuring competition in the UK deposit-taking sector

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 02 December 2016

Working Paper No. 631
By Sebastian J A de-Ramon and Michael Straughan

We use a new regulatory dataset to measure the intensity competition in the UK deposit-taking sector. The novelty of this study is two-fold. First, the dataset allows us to explore trends in competition intensity over an extended, 24-year period from 1989 to 2013 using data for UK-regulated firms which encompasses a wider range of firms than for previous studies. Second, we take a portmanteau approach and estimate a number of different performance-based competition measures common in the literature to support conclusions on the intensity of competition over the period. Our estimates of the Lerner index, the Panzar-Rosse H-statistic and the Boone indicator suggest that competition intensity was strong at the beginning of our sample, but became less intense in the early 2000s. However, the deposit-taker business model bundles together activities in several markets simultaneously, so strong competition in some markets can be offset by the extraction of market rents in others. Importantly, competition intensity decreased (and the ability of UK deposit-takers to extract market rents from customers increased) in the period immediately ahead of the financial crisis (2003–07).

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