THE BRITISH banking system saw a much more serious drop in competition after the financial crisis than other European countries, according to a study released today.
While many European countries saw a drop in financial competitiveness following the 2008 crash, the decline recorded in the UK was particularly severe.
Comparing the years between 1998 and 2006 against the post-2007 period, this new research describes the UK as being struck by “a marked decline in competition”.
The authors, working for the National Institute of Economic and Social Research (Niesr) and Brunel University, assessed the performance of 6,000 banks from 27 countries of the European Union.
The report also says that proposals for banking regulation, like the Vickers report, should carefully consider the implications of such a dramatic change in a country’s competitive environment.
By comparison, competition in the other four large European economies actually rose over the same period, with the French, German, Italian and Spanish systems all showing a minor improvement.
The study also suggests that the Irish banking system was an effective monopoly before the financial crisis, while the Greek system is still extremely uncompetitive.
Generally, financial systems in eastern Europe are less competitive than their western counterparts. Bulgaria, Latvia, Lithuania and Slovenia are mentioned by the authors as systems that are particularly rigid.
The paper shows mixed results for the effect of competition on risk-taking in the financial sector. One measure used suggests that in the long term more competition decreases risk, while another suggests the opposite effect.
The uncertain findings come as the Eurozone embarks on a major regulator change to the currency bloc’s banking system.
Last month, the euro area’s finance ministers reached a tentative agreement on a common resolution mechanism which would set standards for addressing bank failures.