To understand the logic behind this statement, we need to think in terms of the credit multiplier theory with a bank in a monopoly situation. We saw in a previous post last week that a bank is constrained by autonomous and institutional factors in this context to develop credit.
Let’s imagine that we have only one bank, Bank A, in our country. In this case, the bank in question will have no leakage due to interbank payments: the only constraints it will have to bear will be withdrawals of banknotes by its depositors, payments to the Treasury (which has its account at the central bank), and reserve requirements.
If Bank B now comes to compete with Bank A in our country, our Bank A will now have to consider outflows due to interbank payments with Bank B[1]. And if there are three banks, it will have to consider even more outflows… and so on.
This analysis therefore suggests that concentration would have beneficial effects on credit. Of course, this reasoning is simplistic and ignores other factors that mean that concentration can ultimately harm credit development (lack of competition, more risk-averse behavior by banks, too big to fail, etc.).
Julien P.
[1]Even though it will also receive payments from Bank B—potentially higher than the leaks—the simple fact that the leaks are not entirely predictable means that, in theory, liquidity constraints will be greater than in the previous monopoly situation.
