Competition and Market Segmentation
Market structure can be measured using concentration ratios (assets of largest three or five banks to total banking assets), number of banks, and Herfindahl indices. One has to be careful, however, in equating market structure with competitiveness. Contestability of the market—the threat of entry—can be a more important determinant of bank behavior. Regulatory indicators, such as formal entry requirements, share of bank applications rejected over the past five years, and openness of the sector to foreign entrants, can give an indication of contestability of the market. Competition from other financial institutions (such as insurance companies, large credit cooperatives, and capital markets) can play an important role in determining banking system competitiveness. The ownership structure of banks (foreigners, closely held by locals, nonfinancial corporations, government, widely held, cooperative structure, and so forth) can be important for the degree of competition, because banks of different ownership often have different mandates and different clienteles (e. g., see Claessens and Laeven 2004 and box 4.2). In turn, ownership patterns are influenced by regulation and policy on entry, exit, and mergers and acquisitions.
Is the market structure segmented (with less competition than might appear from an overall concentration index) to the extent that different groups of banks deal with different classes of customer (with each customer facing relatively few options)? Evidence on market segmentation is often more anecdotal than quantitative. Interviews with both banks and enterprises often help to determine categories of banks, with competition within each category but with little across categories. There might also be variation in competitiveness across different products. Loan and deposit size distribution data can give supporting evidence for market segmentation, if such data are available. It is also important to assess segmentation between the banking system and other parts of the financial system. This assessment can be important for microenterprises and small enterprises that start their “careers” as borrowers with cooperative or specialized financial institutions; segmentation might prevent them from growing into customers of mainstream banks. If one has established the main features here, it is important to attempt to determine the extent to which they are influenced in a harmful way by inappropriate regulation. This examination could include looking at limits on their lines of business, universal banking, and branching restrictions.