Banking competition and bank size: Some evidence from Italy

This paper assesses the degree of competition of the Italian banking industry and investigates whether there are differences in the competitive behaviour related to the size of the intermediaries. Competition is measured using the Bresnahan-Lau model, estimated on a panel dataset of 125 observations over the period 1989-2013. Annual data are collected from the Bank of Italy, and are aggregated into dimensional categories: major, large, medium, small, and minor banks. The results suggest that the sector is rather competitive and that the level of competitiveness has increased over the observed period. Besides, the events occurred in the Nineties seem to have had a structural effect on banks’ market power, as well as the aftermath of the recent financial crisis. The estimates also point out that smaller banks enjoy a higher degree of market power, which is consistent with the relationship lending that characterizes the interaction between banks and borrowers in Italy.