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Hi, need to submit a 3000 words essay on the topic Impact of Bank Regulations, Market Structure, and Institutions on the Cost of Financial Inter-mediation.It is well established that the efficiency wi
Hi, need to submit a 3000 words essay on the topic Impact of Bank Regulations, Market Structure, and Institutions on the Cost of Financial Inter-mediation.
It is well established that the efficiency with which financial intermediaries particularly banks intermediate capital has many important implications on economic growth (Kunt et al 2004). Hence, the determinants of the cost of financial intermediation are important issues to be researched.M any studies have been done to examine the determinants of the cost of financial intermediation (Kunt and Huizinga, 1998). Among these, the impact of bank regulation, market structure, and institutions on financial intermediation have been debatable issues.
According to the theoretical literature, there are different views on the impact of bank regulations, market structure and institutions on the cost of financial intermediation (Pyle, 1971). Based on one view, it is suggested that creating obstacles to competition and monopolistic power through bank regulations, can adversely affect the efficiency of banks. This is because in this case, some banks will be more powerful which prevent competition and this can adversely affect the efficiency of banks (Kunt and Huizinga 1998 ). Thus according to this view, competition between banks positively affects efficiency. In other words, high concentration prevents competition and adversely affects the efficiency of banks.
Another view is that the banks which are more efficient have high market share and low costs. This theory supports competition by arguing that competition helps banks to earn great market share and high efficiency(Demsetz,1973 ). Based on this view, competition and concentration are not in opposite directions. Rather, competition promotes concentration and hence bank efficiency. However, this theory assumes that there are no effective barriers to entry. .
