Impact of oligopoly on bank margins

Intuitively you might expect a more open market to yield lower net interest margins. This post by JP Koning comparing Canada and America suggests that is not always the case.

His post is not long but the short extract below captures the main observation…

It’s true that we have an incredibly concentrated banking sector up here in Canada, with the big 5 controlling an outsized chunk of the market. Paradoxically, this “oligopoly” doesn’t translate into higher net interest margins for Canadian banks. Margins are actually more elevated in the the hotbed of capitalism, the U.S., even though its banks are far more diffused. This margin difference suggests that competition among banks is more strident north of the border than south of it.

Are U.S. banks more competitive than Canadian banks? Moneyness JP Koning, 13 December 2022

Would be interested to read any insights on why this is so. For what it is worth …

  • I wonder how much differences in business mix explain the difference in margin. I am not an expert on Canadian banks but my guess is that they have a lot more housing loan exposure than their American counterparts.
  • It would also be interesting to see how much of the margin difference translated into a higher or lower return on equity.

Tony – From the Outside