Banks charge high fees because there is no real competition

[Wahrheit]

 

For quite some time, depositors have complained about banking fees. Banks sometimes charge you a fee to open and maintain a checking account; they often charge people fees for using ATMs managed by other banks. A great deal of controversy has surrounded “overdraft fees,” charged when customers write a check for an amount larger than the balance in their checking account. Critics argue that banks make money on overdraft fees because customers underestimate the risk of bouncing a check, which can occur just because of the timing that banks use to record credits and debits; banks in this way make money on mental lapses that everyone is prey to.

 

 

However, a new paper by a group of economists casts doubt on this happy story. José Azar, Sahil Raina, and Martin Schmalz argue that the long-standing assumption that the market for banking services is competitive is based on a defective measuring rod. This traditional measuring rod is called the Herfindahl-Hirschman Index. The index is just a fancy way of measuring the amount of competition in an industry based on the market shares of the various participants. Imagine a small town with 100 banks, each of which owns 1 percent of the market. The HHI index will be very low, reflecting the assumption that each of the banks must compete vigorously for customers by offering them good service and low prices. If one of the banks buys the other 99, the HHI index will shoot through the roof—we now have a monopoly. If, instead, the market consolidates to two or three large banks and a handful of small banks, the HHI index will be somewhat less high, indicating that competition exists but is not robust. Prices will fall somewhere between the competitive and monopoly level.

 

http://www.slate.com/articles/news_and_politics/view_from_chicago/2016/01/banks_charge_high_fees_because_there_is_no_real_competition.single.html

[Dad]

I'll be honest and say this is a long, complicated issue for me (who is ignorant to the over all topic).

 

But looking at this, how do you prevent monopolies in banking?  How do you take these enormous banks and create competition among them?  I like the idea of limiting mutual fund purchasing power.  But does this prevent the bank owners from creating their trusts?