The analysis by Xavier Vives covers a large set of issues ranging from competition among banking firms to competition among regulators. These comments will focus on two issues: Contestability in banking markets and structural adjustments.

To introduce the discussion, it is useful to position the paper, both in terms of its empirical validity and its use of economic theory. The banking activities under discussion are commercial retail banking activities: deposit taking and lending on retail and small- and medium-size company markets. This focus is quite legitimate given the theoretical development which, rooted in information asymmetry, apply best to ‘small’ clients; casual empirical studies assign most of the gains expected from European Banking integration to the retail market. As regards theory, the author argues quite rightly that a theory of banking competition is almost non-existent and that the widely used 1970s Klein-Monti model concerns one banking firm. However, it will be argued that the separation theorem obtained in this model is very likely to hold in more complex models, with important implications in assessing the degree of contestability of banking markets. Finally, the author argues convincingly that an analysis of banking competition should address the very specific nature of banking services, i.e. asymmetric information in monitoring loans and in the provision of liquidity insurance.

Contestability in banking markets

In view of many bank mergers realized in several European countries, one is forced to wonder about the effective gains to be expected from European integraton. Baumol, Panzar and Willig (1982) have argued that competition does not require a large number of firms if markets are contesable, that is if barriers to entry are low.