When They Go Low, We Go High? Measuring Bank Market Power in a Low-for-Long Environment

IMF Working Papers, May 27, 2021

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The paper examines trends in bank competition since the early 2000s.
The Lerner index shows a marked increase in market power in advanced economies, especially after the global financial crisis.
Other frequently used indicators of banking sector competition show much more muted changes.
The authors attribute the disconnect to the significant drop in policy rates after the crisis.
Adjusting the Lerner index for the impact of policy rates reveals that market power has been fairly constant in advanced economies, aligning with other indicators and resembling the pattern observed in emerging markets.

Lerner index: indicates a marked increase in market power in advanced economies after the global financial crisis.
Alternative competition indicators: show much more muted evidence of increasing market power.
Policy rate decline: the significant drop in policy rates in the aftermath of the crisis can explain the divergence between the Lerner index and other indicators.
Adjusted Lerner index: when accounting for policy rate effects, market power in advanced economies appears fairly constant and similar to emerging markets.

The sensitivity of the Lerner index to policy rates implies raw Lerner trends may conflate monetary policy effects with changes in competitive structure.
Researchers and policymakers should adjust market-power measures for policy-rate movements to avoid misinterpreting changes in banking competition.
Consistent measurement across indicators yields a clearer view: no large secular rise in market power in advanced economies once policy-rate effects are controlled for.

IMF Working Paper No. 2021/149, accessed via the IMF eLibrary.