ABSTRACT
The issue of potential excess capacity in banking is a topic of interest to supervisors and central banks, as well as to the banking industry itself. In recent years, many commentators have suggested a relation between the emergence of such excess capacity and the development of banking in an increasingly global and deregulated situation with rapid technological development. In this context, excess capacity might on the one hand be seen as making excessive risk taking in order to maintain profitability more likely (see BIS 1996), while on the other the potentially disruptive consequences of a rapid removal of capacity from the banking sector can also be seen as a cause for concern. From a viewpoint of competition policy, there is also the issue of whether the removal of excess capacity may lead to concentration and risks of anti-competitive behaviour. In this overall context, this paper considers the conceptual and policy issues raised by excess capacity in banking, and illustrates the various indicators of potential excess capacity using data for EU countries, with comparative data provided from the US. For EU countries, such indicators are, it is suggested, of interest notably in the light of the advent of EMU, which will act to integrate banking sectors across the Union much more closely.
