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Ownership Concentration and Competition in Banking Markets

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Many countries prohibit large shareholdings in their domestic banks. The authors examine whether such a restriction restrains competition in a duopolistic loan market. Blockholders may influence managers' output decisions by choosing capital structure, as in Brander and Lewis (1986). For the blockholder, debt has an additional benefit: it "disciplines" a manager by reducing the amount of free cash flow from which the manager can divert funds. A larger blockholder can exert more control. The authors show that an economy with blockholders often leads to a more competitive banking sector. Hence, a restriction on the size of blockholdings has anti-competitive results.

Published In:

Banks and Bank Systems (1816-7403)
2008. Vol. 3, Iss. 4, pp. 16-28

DOI: https://doi.org/10.34989/swp-2006-7