Measuring competition in the banking industry is challenged by the highly regulated nature of banking. Multiple licencing options can restrict banks in their service offering. The exclusion of non-bank competitors offering bank like products and services from the measurement, and a range of ancillary services offered by banks not directly related to banking, complicate simple mathematical models.
The most popular method of measuring competition in banking is the Herfindahl-Hirshman index that measures concentration as a proxy for competition. We examine 17 different mathematical models used to measure competition and begin framing the challenges that need to be considered to ensure that policy decisions, driven by competition concerns, will have the greatest positive impact on social welfare.
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