Journal
Is home bias biased? New evidence from the investment fund sector
A new measure of firm-level competition: an application to euro area banks
Abstract
- Abstract
This paper extends Boone (2008) by introducing a competition measure at the individual
firm level rather than for an entire market segment. - We apply this extended Boone indicator to individual bank-level competition
in the loan market in the four largest euro area countries and Austria. - Our new measure of firm-level competition enriches and complements
other competition measures and provides a promising starting point for future market
power analyses. - The only measure among non-structural measures that is based on the
concept of competition as a process of rivalry is the Boone (2008) indicator. - We introduce
a new performance measure of competition by extending the Boone indicator to the
individual firm level. - Introduction
The ability to reliably measure competition is valuable to researchers, analysts, and
policymakers, especially antitrust authorities, financial supervisors, and central banks. - One broad
category of indicators often used to measure competition are structural competition
measures, such as static concentration measures, and dynamic measures, e.g., entry and
exit rates. - Out of these measures, the only measure based on the
concept of competition as a process of rivalry is the Boone indicator. - This study introduces a new performance measure of competition by extending the
Boone indicator to the individual firm level. - It thus measures the
increase in profits in percent of one percentage point increase in efficiency, with marginal
costs as measure of efficiency. - We extend the theoretical
underpinning of the measurement of competition for the entire market of Boone (2008) by
a new measure of individual firm-level competition. - A concern of the literature is the gap
between the practical application and the theoretical framework of Boone (2008). - We introduce within the same theoretical
framework a new measure of competition on firm level, the MRP. - Our new
measure significantly augments the antitrust evaluative framework by shedding light on
whether a merger results in a less competitive market. - Our novel indicator focuses on
firms? incentives to enhance their relative efficiency, as manifested in the elasticity
between relative profits and efficiency. - However, an inefficient firm that is foreclosed could be more
competitive than the larger efficient firm that relies on its scale economies. - Our new metric of competition unveils
banks? ability to influence their profitability in the short term by cutting costs relative to
their peers. - The new MRP indicator provides the ability to assess the impact
of individual banks? competitiveness on their interest rate-setting behaviour in loan
markets. - Incorporating this information promises a more refined understanding of the impact and
timing of monetary policy rates changes on the real economy. - Section 3 introduces within the Boone
(2008) theoretical framework our new measure of individual firm-level competition,
including the interpretation of the MRP. - Section 4 provides an application of our new
ECB Working Paper Series No 29256
individual firm-level competition measure to the loan market.
- The StructureConduct-Performance paradigm (SCP) provides a traditional framework in the field of
industrial organization for analysing competition behaviour in markets. - Concentrated
markets ease the possibilities to collude implicitly or explicitly and therefore concentrated
markets result in higher prices and profits. - For example, a tougher competition
setup may lead to a reallocation of market shares, potentially forcing some firms to exit
the market. - This approach gives firms? strategic behaviour
central stage and focuses on the strategic interaction on prices and quantities, known as
conjectural variation. - Another measure from
this strand of literature is the H-statistic developed by Panzar and Rosse (1987). - The only competition measure from this performance literature where competition is the
outcome from a process of rivalry is the Boone indicator. - A continuous and monotonically increasing relationship exists between
RPD and the level of competition if firms are ranked by decreasing efficiency. - (2013) compare the Boone indicator with the price-cost margin
and conclude that the profit elasticity is a more reliable measure of competition. - The high
elasticity of profits to efficiency unequivocally indicates that the high market shares and
therefore high profits are due to high efficiency. - A firm that quickly passes changes to the input prices is seen as a price
taker with little market power. - Indicators of competition tend to measure different phenomenon and may provide
conflicting messages, as reported for European banking by Carbo et al. - Application 2: Test the ?quiet life? and related market structure hypotheses using the
MRP as competition or market structure measure. - Data
Our application to individual bank-level competition in the euro area loan market uses
balance sheet and income statement data from the Moody?s Analytics BankFocus for the
calendar years 2013-2020. - As such, most publications
on competition in the euro area includes the largest four member states. - Due to these restrictions the database was reduced to an unbalanced panel of up to 1862
banks (depending on the year) from five euro area countries. - Application 1: Measure bank competition using MRP
Looking at the distribution of the MRP for individual banks (Fig. - A similar finding for the four largest euro area countries as a group is
reported in Carbo et al. - Application 2: Test of market structure hypotheses using MRP
Our new measure of individual-bank competition can be used to test market structure
theories. - Euro area banks? market power,
lending channel and stability: the effects of negative policy rates, European Central Bank
Working Paper, 2790 (February). - A
new approach to measuring competition in the loan markets of the euro area, Applied
Economics, 43 (23), 3155?3167. - Impact of bank competition on the interest rate pass-through in the euro area, Applied
Economics, 45 (11), 1359?1380.
Central bank digital currency and monetary policy implementation
Transactional demand for central bank digital currency
Digital euro safeguards – protecting financial stability and liquidity in the banking sector
A digital euro would offer a wide range of
- A digital euro would offer a wide range of
financial stability benefits, including safeguarding the role of public money and
strengthening the strategic autonomy and monetary sovereignty of the euro area in
the digital era. - Keywords: CBDC, digital euro, bank intermediation, financial stability risks.
- A digital euro has the potential to offer a wide range of financial stability
benefits for the digital era. - A digital euro would
stimulate financial innovation among private sector entities and enhance the
efficiency and resilience of the financial system by supporting competition and
diversity within it.3 In addition, a digital euro would strengthen the strategic autonomy
and monetary sovereignty of the euro area. - A digital euro would be designed to minimise risks to the financial system.
- 2
The preparation phase will pave the way for a future decision on whether or not to issue a digital euro.
- When gauging the implications for the euro area banking sector of introducing a
digital euro, take-up would be key, as it would determine the level of deposit
outflows. - In the latter case, the
issuance of a digital euro would not affect banks? balance sheets, since banks would return euro
banknotes to the Eurosystem in exchange for digital euro. - Banknotes and digital euro are two different
types of central bank liability, so a swap between banknotes and digital euro would only affect the
composition and not the size of the Eurosystem?s balance sheet. - In our analysis, we model only the
substitution of commercial bank deposits with a possible future digital euro. - 8
The legislative proposal on a digital euro provides for the inclusion of such safeguards and establishes
specific criteria for the limits, aiming to contain the use of a digital euro as a store of value. - ECB Occasional Paper Series No 346
4
2
The added value of digital euro
safeguards such as holding limits
To understand the benefits of digital euro safeguards, such as holding limits, it
is useful to first consider the implications of introducing a CBDC without
adequate safeguards. - (2022), ?Central bank digital currency and bank intermediation: Exploring different
approaches for assessing the effects of a digital euro on euro area banks?, Occasional Papers, No 293,
European Central Bank, Frankfurt am Main, May. - deciding to adopt the digital euro, and (ii) the average amount of digital euro in a
wallet. - At the same time, as discussed in this paper, the design of a digital euro would
include effective safeguards, such as individual holding limits, to mitigate
potential financial stability risks. - ECB Occasional Paper Series No 346
15
an upper bound on the amount of digital euro in circulation, thereby addressing and
limiting financial stability concerns associated with the introduction of a digital euro. - (2023), ?A digital euro: gauging the
financial stability implications?, Financial Stability Review, ECB, November.
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