Banking Market Structure and Macroeconomic Stability: Are Low-Income Countries Special?

This paper explores the channels through which the structure of banking markets affects macroeconomic volatility

Abstract

The structure of banking markets in low income countries differs from developed market economies. Banking systems in lower income countries are typically smaller and less open than those in developed countries. Differences in market concentration are less stark. In this paper, we explore the channels through which the structure of banking markets affects macroeconomic volatility. We focus on granular effects: if the degree of market concentration in the banking sector is sufficiently high, idiosyncratic shocks affecting large banks can impact aggregate volatility. We find some weak evidence for granular effects in banking. However, our results suggest that a high share of domestic credit to GDP has a stronger effect on volatility in low income countries. The effects of de facto financial integration are stronger in these countries as well.

This work is part of the ‘Macroeconomics in Low-income countries’ programme

Citation

  • Bremus, F.; Buch, C.M. Banking Market Structure and Macroeconomic Stability: Are Low-Income Countries Special? Presented at Joint RES-SPR Conference on Macroeconomic Challenges Facing Low-Income Countries; Washington, DC, January 30, 2014. International Monetary Fund, Washington DC, USA (2014) 33 pp.

  • Bremus, F. and Buch, C. M. (2015) Banking Market Structure and Macroeconomic Stability: Are Low‐Income Countries Special? Pacific Economic Review, 20: 73-100. doi:10.1111/1468-0106.12095

Published 20 February 2015