A study released yesterday by the Bank of Canada suggests that having fewer Canadian banks would not necessarily hamper competition.

The study, called Competition in Banking, found that traditional notions about corporate concentration do not apply to banks because they operate so differently from other businesses. As a result, the study said researchers have developed a new approach to examining “market power” within the banking sector.

“This relatively new literature consistently finds that banking markets around the world fall between the two extremes [of perfect competition and monopoly] and that the number of banks in the markets is not necessarily a good indication of competitive behaviour,” said the study, which was written by Carol Ann Northcott, a senior analyst at the Bank of Canada.

The report was included in the June issue of the bank’s Financial System Review.

In the study, Northcott noted that one researcher found a positive relationship between bank concentration and effective competition, or “contestability.”

“In this work, as in other studies, the banking market in the Netherlands is found to be the most contestable despite its high level of concentration, and Canada scores higher than countries such as Germany and the United States, which have a much larger number of banks,” she wrote.

That research and others “also confirm that contestability is associated with a greater presence of foreign banks, open entry and exit, few restrictions on permitted activities, and well-developed legal and financial systems.”

Ms. Northcott said studies have also shown that in some cases a handful of large banks can operate better branch networks. She quoted one report that demonstrated how two large banks with extensive branch networks can provide more competition than a large number of small banks.

“The approaches discussed here indicate that concentration, or the number of banks, may not in itself be a good indicator of competitive behaviour.”