Ann Owen, the Henry Platt Bristol Professor of Economics, and Assistant Professor of Economics Javier Pereira recently published a study in the Review of Development Finance. “Bank Concentration, Competition, and Financial Inclusion” used panel data from 83 countries over a 10-year period to explore the relationship between bank size and consumer access to banking services.
The results of their study suggest that greater banking sector concentration is associated
with access to deposit accounts and loans, as long as the market power of banks remains limited. In addition, countries in which regulations allow banks to engage in a broader scope of activities are characterized by greater financial outreach.
These results are consistent with theories that emphasize that larger banks may be able to diversify loan portfolio risks more efficiently due to larger economies of scale and scope leading to greater access to finance.
While there may be other reasons to limit the concentration in the banking industry and keep banks smaller, such as the potential threat to financial stability that very large banks may pose, this work suggests that a tradeoff in reducing concentration in the banking industry may be a reduction in economies of scale that help to increase financial inclusion.
The authors hope these findings will help develop better country level policies to foster financial development – a driver for economic development and reduction of income inequality.
