Ideas de Peso | Competitiveness in the Financial System

Alternative measures

We invite you to read the new article on Ideas de Peso, a blog where economists working at the BCRA share their opinions:

In theory, there are opposing approaches about the impact of competitiveness upon the possibilities to, and conditions of, access to financial services. The hypothesis of market power suggests that a higher level of competitiveness in the banking system brings about increased efficiency in financial institutions, decreases the financing cost and improves access to financial services. In turn, the information hypothesis supports that where moral hazard problems arise due to information asymmetries between banks and their borrowers (i.e., one of the parties to a contract possesses greater material knowledge than the other party seeking to take advantage of all such information), banks shall invest in private information acquisition and forge long-term relationships with their borrowers in order to overcome such a disadvantage. A higher level of competitiveness discourages this process to the detriment of companies' and households' access to financial services.

Although empirical works show results in favor of one or other position, it is worth considering that, in general, market power hypothesis has received more support. For example, Love y Martínez Pería (2015) made firm-level surveys for 53 countries concluding that low competition decreases firm's access to financing. Taking into account these results and in light of the BCRA’s monetary policy aimed at promoting the access of the population to financial services, this work seeks to assess the extent to which the Argentine financial system operates under similar conditions to a competitive market. Particularly, the BCRA will work hard in the direction of empirical evidence about changes in competitiveness vis-a-vis the measures it has been implementing since 2016 with a view to promoting this practice. In this regard, this work supplements the first analysis published in the latest o latest Financial Stability Report (FSR, first half 2018, Section 5).

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