Is competition in banking often thought to erode profit margins, leading firms to have smaller buffers against failure?

According to the article: "Bank concentration, competition, and crises: First results" by Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine.

Is competition in banking often thought to erode profit margins, leading firms to have smaller buffers against failure? How could increased competition make a banking system less likely to experience a crisis?

https://core.ac.uk/download/pdf/6336846.pdf

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The competition in economics is where diverse economic firms like the banking sector get into contention to provide goods and services essential to preferred consumers. Competition has mixed impacts on the profit realization by different companies; this article analyzes the correlation between bank competition, bank concentration, and banking system diversities and fragilities. The concentration of many banks reduces the chances of meeting risks compared to the instances of a few banks collaborating in enhancing their services. The high-profit margins present a" buffer" that curbs or controls the adverse effects on transactions and boosts the bank's trading capacity.

The competition aspect presents minimal chances of facing adverse challenges since bank managers learn from others and make necessary adjustments to curb similar experiences. The few challenges encountered are addressed as stepping stones in advancing service provision past other competitors. This also has significant impacts on bank managers and owners who have a productive working environment due to the few risks expected hence curbing banking distress. The competition also provides an avenue to better services provided to the customers; this enhances continued high-profit realization despite competition rates. However, some banks may be significantly affected due to inadequate policy formulation and management, leading to their slowed growth and, to some extent closing down.

High competition in banking reciprocates to declined banking system fragility; hence alleviated profits eradicate the negative relationship between banking systems and bank concentration. The competition calls for affordable interest rates; this attracts more creditors; consequently, profitability raises default rates. The need to increase profits in the banking sector calls for tactical approaches in competition; incorporating more members and affordable interest rates results in high-profit margins via appropriate strategies.

The competition in economics is where diverse economic firms like the banking sector get into contention to provide goods and services essential to preferred consumers.

frankdube answered 1 year ago

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