UK Bank Services for Smes: Are They Competitively Priced? Faculty of Finance Working Paper - Revised April-2004
25 Pages Posted: 19 May 2006
Date Written: 2004
This research examines the pricing behaviour of British financial institutions with respect to key bank products/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 competitive structure that best describes the UK's SME banking market. There is evidence of a complex oligopoly, with considerable SME inertia. As a result, bargain and rip-off products are found in each market. Some of the key policy recommendations made by the Competition Commission (2002) are reviewed in light of findings from this econometric study. Policies should be directed at combating 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, SME banking markets
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