Thoughts on Entry Regulation, Financial Market Competition and Financial Crisis

Seminar paper from the year 2009 in the subject Business economics - Economic Policy, printed single-sided, grade: 1,0, University of Frankfurt (Main), course: Financial Regulation, 56 entries in the bibliography, language: English, abstract: This paper deals with the terms entry regulation, financial market competition and alsoindicates connections to potential financial crises. Authors in research have beenattempting for years to build up a remedy for an optimal set-up.1So, this is the reason I observe a seemingly never-ending discussion between twounofficial parties: Neither the proponents of the concentration-stability view, neitherthose of the concentration-fragility view will retreat from how to install propercompetition in order to ensure stability.This paper also aims to understand the terms of both parties; their arguments andwhether either monopolistic structures or competition are desirable in the financialindustry.Therefore, I lay the theoretical foundation. I demonstrate with a model of the authorsBoyd & De Nicoló that even economies with monopolistic structure are exposed torisk-taking activities and not only banks in competitive industries. In chapter 3, I turnto the topic Entry Regulation . I unveil different yardsticks of entry regulation, revealsome advantages and draw up my own index. I show that mainly countries thatsuffered devastating crises in recent times have stringent entry regulation. This can beshown by regarding their high capital requirements or their barriers for submittinginformation of managers, future plans or composition of shareholders. I also show thatentry regulation is an appropriate means for governments to control or to curbcompetition. In the last chapter, it is also shown that high entry capital requirementsprevent mainly weak or inefficient banks from entry.In chapter 4, I present two ratios for assessing competition: The concentration ratio(CR) and H-Statistics (H). CR is widely used in literature and defines the market shareof the largest banks in a country. By presenting CR, I also turn back to the argumentbetween the concentration-stability and concentration-fragility views. Moreover, I domy part to debilitate the somewhat misleading statement that the European bankingmarket is in a phase of consolidation and concentration. I do this by revealing that theconcentration ratio slightly decreased in a time span of four years during the currentdecade. H-Statistics is a ratio to find out more about the ferocity and contestability of a market and how market participants react to changes in output prices. I show that thereis, maybe surprisingly, no strict correlation between CR and H-Statistics.[...]