Market power, optimal scale and competition promotion in banking: Analysis in the GCC region

Abstract

We propose an approach to identify optimally scaled banks and analyse the competition levels among banks in different stages of production in six countries of the Gulf region. The empirical results show that the global financial crisis curbed the rise in the market power of banks, but the market power continued to increase straight after 2009. Also, we show that the existing methods fail to identify that a significant proportion of banks across different countries, up to 90%, are operating at an optimal scale. Finally, we discuss the misclassification of banks by the traditional approach to scale analysis and its implications for decision-making by competition authorities and central banks that assess and promote competition in banking. We advocate a more nuanced approach to competition policy that recognizes the potential impact of various phases of banks' production process on the competition.