How enhancing the cost efficiency of banks affect the social cost of financial intermediation?

What is it about?

The issue of welfare loss from mispricing due to the exercise of market power of banking firms can be minimized. It should, however, take into consideration the advent of cost-efficient banks and efficient knowledge about local market dynamics. In other words, banks with the highest market knowledge and are cost efficient are better placed to protect financial consumers. Further, there is heterogeneity in the impact of cost efficiency on banks’ welfare performance. Specifically, cost efficiency has a significantly larger hedging impact on welfare losses in banks with extreme losses to financial consumers. Therefore, cost efficiency effect on banks’ welfare performance is conditioned on the level of welfare losses in the banking sector. Additionally, if welfare gain is synonymous with cost-efficient banks, then the presence of a quiet life is typical of financial consumer protection.

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Photo by Birmingham Museums Trust on Unsplash

Photo by Birmingham Museums Trust on Unsplash

Why is it important?

This study examines how cost efficient banks protect financial consumers by hedging the social cost induced by mispricing resulting from the exercise of banks market power. The study is important because it provides that cost efficient banks and welfare gains may not be mutually exclusive and that these two policy variables co-evolve.

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