UK Bank Services for Smes: Are They Competitively Priced?
Cass Business School Faculty of Finance Working Paper
25 Pages Posted: 19 May 2006
Date Written: February 2003
This research examines the pricing behaviour of UK financial institutions with respect to key bank products or services offered to small and medium sized enterprises (SMEs) including current accounts, investment accounts, business loans, and mortgages. Using monthly data from March 1996, it is possible to gauge individual firm reactions to changes in a market rate of interest, to identify factors influencing the setting of deposit and loan rates, to rank banks according to whether they offer bargains or rip-offs, and to assess the over all competitive structure of SME banking markets. Some of the key policy recommendations made by the Competition Commission (2002) are reviewed in light of findings from this econometric study. There is evidence of a complex oligopoly, with considerable SME inertia. As a result, bargain and rip-off products are found in each market. Policies should be put in place to combat this inertia - if well informed businesses could switch financial firms and accounts with relative ease, greater competition would be encouraged and the number of rip-off products reduced.
Keywords: Complex oligopoly, SME inertia, shadow deposit rates, bargain and rip-off
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