The effect of monetary policy on bank competition using the Boone index

An interesting strand of the theoretical literature on measuring competition posits that when competition increases in an industry, output is reallocated to more efficient firms. Our first contribution is on the methodology for the empirical implementation of this theoretical test of a change in competition. This contribution moves from the relationship between a change in competition and a single all-encompassing efficiency, to a set of relationships between a change in competition and multiple efficiencies that measure different components of economic performance. Our second contribution is to apply our empirical methodology to large U.S. banks. The results suggest that competition intensified between these banks during the financial crisis and beyond (2008−15), vis-à-vis our pre-crisis period (1994−07). This points to an increase in competition that has exogenous origins such as the decrease in the loan-deposit rate spread, which represented the collateral damage to banks from monetary policy to moderate the Great Recession.