Question

A new resident of Canada complains that unlike other countries, there is not enough competition among banks and fees are too high. They say that given there is deposit insurance in Canada, the government should increase bank competition. You say No. Why

Answer 1

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Question:

Answer:

Bank is a backbone of finacial industry and economy also. The performance of bank directly affect the performance of overall economy. Normally a competitive market is more healthy for a economy that increase consumer surplus and help in maximizing social welfare. But if we talk about the banking sector then the impacts of cometetion is not always favorable.  In case of high market concentration or polorization the bank are bigger in terms of asset and bank and achieve higher economies of scale so that the bank can have a lower marginal cost. By having a lower marginal cost bank can provide lower price for customer that increase consumer surplus. The main source of income for banks is net interest rate margin (interest income earn - interest income paid). But when competition incraese then its incraese the number of product availability, service providers that incraese the competion level and negatively affect the net interest margin. Other side price competion incraese the risk also. Due to hudge competion bank try to increase their market penetration or customer base and lend to high risk profile customers that incraese default risk and increase risk for econ omy also. Due to high competion level the size of bank is small and the bank are smaller in terms of asset and bank and do not achieve higher economies of scale so that the bank can have a higher marginal cost. By having a higher marginal cost bank can provide higher price for customer that decrease consumer surplus. During the loan default small bank affected more that affect the bigger banks further and then overall economy get affected. So, allowing for more competition or high competion level in banking industry brings additional overall risk and that creat problem at wide level.

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