Banking Competition and Access to Finance in Developed Countries

Abstract

This paper explores the association between banking competition and firms’ access to finance in developed countries using three measures of banking sector competition – the three bank concentration ratio, the Herfindahl–Hirschman Index and the H-statistic, with two different regression techniques – the ordered probit and the ordered logit model. Using firm-level data for 12 developed countries, I find that the three proxies give consistent results with both models: higher degrees of competition in the banking sector are associated with greater access to credit for firms in lower income developed countries, which supports the market power hypothesis. In contrast, more banking competition leads to less access to finance in developed countries with higher levels GDP per capita, which supports the information hypothesis. This result is robust to the inclusion of additional control variables. Moreover, Small and Medium Enterprises (SMEs) face more financing obstacles as compared to large corporations, ceteris paribus. SMEs also tend to benefit more than large firms when a developed country with low GDP per capita increases its banking contestability.