A Test of Competition in Canadian Banking

THE DEGREE OF COMPETITION in commercial banking, always a subject of some controversy, has assumed increasing importance in recent years. Actual and projected structural consolidation within the U.S. banking industry, reflecting both mergers and failures, has prompted concerns among some observers over the potential for monopoly power in local banking markets. In Europe, the lowering of economic barriers in 1992 affords the opportunity for consolidation of the banking structure across national boundaries as well. In assessing the likely impact of these changes on industry conduct, it is useful to explore the degree of competition already observed in a banking system that is significantly more concentrated than in the United States. It is also useful to measure the impact on competition of regulatory and structural changes in such a system. The Canadian banking industry exhibits both of these characteristics, and accordingly forms the basis of the present study. The findings are twofold: conduct in the industry has resembled perfect competition over the past twenty-five years, and furthermore has apparently undergone a slight pro-competitive change since the 1980 Bank Act revisions. These findings reinforce the view that neither the United States nor Europe is doomed to face substantial degradation of competition from projected changes in the structure of banking. Thousands of banks are not needed for highly competitive conduct. And