What determines interbank competition? And why should we care?

Traditional measures of competition are inappropriate for banking markets and there exists no consensus alternative measure. As a direct consequence, the empirical relationship between interbank competition and financial stability remains unclear. This paper adopts ideas from the new industrial organisation literature to measure interbank competition in the early twentieth-century Dutch rural market for small-scale deposits using newly collected data. It finds that transaction and information switching costs are both important sources of banks' market power.