Claudia Girardone

Bank Competition, Concentration and Efficiency in the Single European Market

The deregulation of financial services in the European Union (EU), together with the establishment of the Economic and Monetary Union, aimed at the creation of a level playing-field in the provision of banking services across the EU. The plan was to remove entry barriers and to foster both competition and efficiency in national banking markets. However, one of the effects of the regulatory changes was to spur a trend towards consolidation, resulting in the recent wave of mergers and acquisitions. To investigate the impact of increased consolidation on the competitive conditions of the EU banking markets, we employ both structural (concentration ratios) and non-structural (Panzar-Rosse statistic) concentration measures. Using bank-level balance sheet data for the major EU banking markets, in a period following the introduction of the Single Banking Licence (1997-2003), this paper also investigates the factors that may influence the competitive conditions. Specifically, we control for differences in efficiency estimates, structural conditions and institutional characteristics. The results seem to suggest that the degree of concentration is not necessarily related to the degree of competition. We also find little evidence that more efficient banking systems are also more competitive. The relationship between competition and efficiency is not a straightforward one: increased competition has forced banks to become more efficient but increased efficiency does not seem to be fostering more competitive EU banking systems. Copyright Blackwell Publishing Ltd and The University of Manchester 2006.

Analysing the determinants of bank efficiency: the case of Italian banks

This study investigates the main determinants of Italian banks’ cost efficiency over the period 1993–1996, by employing a Fourier-flexible stochastic cost frontier in order to measure X-efficiencies and economies of scale. Quality and riskiness of bank outputs are explicitly accounted for in the cost function and their impact on cost efficiency levels is evaluated. The results show that mean X-inefficiencies range between 13 and 15 per cent of total costs and they tend to decrease over time for all bank sizes. Economies of scale appear present and significant, being especially high for popular and credit co-operative banks. Moreover, the inclusion of risk and output quality variables in the cost function seems to reduce the significance of the scale economy estimates. Following Spong et al. (1995) a profitability test is undertaken that allows for the identification of banks that are both cost and profit efficient. The results suggest that the most efficient and profitable institutions are more able to control all aspects of costs, especially labour costs. Finally, the data are pooled to carry out a logistic regression model in order to examine bank- and market-specific factors that influence Italian banks’ inefficiency. Confirming Mester (1993, 1996), inefficiencies appear to be inversely correlated with capital strength and positively related to the level of non-performing loans in the balance sheet. The analysis also shows that there is no clear relationship between asset size and bank efficiency. Finally, it is possible to infer that quoted banks seem to be on average more efficient than their non-quoted counterparts.

Financial conglomeration: efficiency, productivity and strategic drive

Consolidation in the global banking industry has resulted in the emergence of financial conglomerates that conduct an extensive range of businesses with a group structure. To date, few studies have investigated the performance features of such groups. This study aims to extend the literature by evaluating the cost and profit efficiency and productivity change of Italian financial conglomerates during the 1990s using both parametric and nonparametric approaches. The impact of diversification and growth strategies on cost and profit efficiency is also investigated. The results seem to indicate that Italian banking groups have benefited from a consistent improvement in profit efficiency, while they have not experienced a clear increase in cost efficiency. Indeed, profit efficient banking groups display a high risk-high return profile.

An analysis of the relevance of off-balance sheet items in explaining productivity change in European banking

The 1990s have witnessed a significant growth in bank income generated through non-traditional activities, especially for large EU universal banking institutions. Using the non-parametric Malmquist methodology this study analyses the impact of the inclusion of off-balance sheet (OBS) business in the definition of banks’ output when estimating total factor productivity change indexes. Whereas the results reinforce the prevalent view in the recent literature, indicating that the exclusion of non-traditional activities leads to a misspecification of banks’ output, the impact of the inclusion of these activities varies. Overall, the inclusion of OBS items results in an increase in estimated productivity levels for all countries under study. However, the impact seems to be the biggest on technological change rather than efficiency change.

A comparative study of the cost efficiency of Italian bank conglomerates

Outlines previous research on the efficiency of the Italian banking system, describes the structure of Italian banking groups and uses parametric (stochastic cost frontier) and non‐parametric (data envelopment analysis) approaches to assess the efficiency of Italian bank conglomerates in 1995 compared with the parent companies and subsidiearies. Explains the methodology and presents the results, which suggest that parent companies and subsidiaries are more efficient than groups and that efficiency is not related to size. Analyses efficiencies of scale and scope to show that bank groups gain more economies of scope than parents or subsidiaries; but finds mixed results for economies of scale.

Banking Sector Performance in Latin America: Market Power versus Efficiency

TSince the mid-1990s the banking sector in the Latin American emerging markets has experienced profound changes due to financial liberalisation, a significant increase in foreign investments and greater mergers activities often occurring following financial crises. The wave of consolidation and the rapid increase in market concentration that took place in most countries has generated concerns about the rise in banks’ market power and its potential effects on consumers. This paper advances the existing literature by testing the market power (Structure-Conduct-Performance and Relative Market Power) and efficient structure (X- and scale efficiency) hypotheses for a sample of over 2,500 bank observations in nine Latin American countries over 1997-2005. We use the Data Envelopment Analysis technique to obtain reliable efficiency measures. We produce evidence supporting the efficient structure hypotheses. The findings are particularly robust for the largest banking markets in the region, namely Brazil, Argentina and Chile. Finally, capital ratios and bank size seem to be among the most important factors in explaining higher than normal profits for Latin American banks.

Emerging Themes in Banking: Recent Literature and Directions for Future Research

This paper presents a review of the recent banking literature centred on the core themes of performance, risk and governance of financial institutions. We write this review against the backdrop of the recent financial crisis and the major changes it caused to banking sectors in many countries. Several themes emerge, but the overarching issue relates to the need to better understand bank risk-taking incentives and the implications for systemic stability. Specifically, there is a need for more work on: the role of safety net subsidies and how these relate to systemic risk; financial innovation and the adoption of new products and processes; and how innovative behaviour links to risk-taking, market returns and contagion. Future research could also be directed to provide a better understanding of the inter-connections between competition, capital, profitability, liquidity and risk.

Multinationality Matters in Innovation: The Case of the UK Financial Services

The paper starts with a brief summary of theoretical perspectives on the relationship between multinationality and innovation and the move from a centralized and hierarchical perspective to a more decentralized network‐based one. Four hypotheses are set up to test the relationship between multinationality and innovation, using data from the Community Innovation Survey 12 for the financial services sector. All models control for the size of the enterprise. The results show that multinationality is positively related to innovation activities. The positive impact of being part of a multinational company (MNC) on the propensity to innovate seems largely due to the fact that MNCs operate in different countries rather than, or more than, to the enterprise being part of a group. The relevance of multinationality appears to be higher, the higher the degree of internationalization of the company of which the enterprise is part. The country of origin of the company appears also to be important.

Competition issues in European banking

Purpose - The purpose of this paper is to assess the outcome of European Union (EU) deregulation and competition policies on the competitive conditions of the main EU banking markets. Design/methodology/approach - After a review of deregulation and competitition policies in the EU banking industry, the degree of competition in the largest five EU banking markets using is tessted both structural (concentration ratios and Herfindahl-Hirshman indices) and non-structural ( Findings - Results indicate that EU banking markets are becoming progressively more concentrated and that there is no evidence of an increase in competitive pressure. Country differences are also apparent thereby indicating that despite the sustained regulatory interventions, significant barriers to the integration of EU retail banking markets remain. In line with recent literature, the analysis also seems to provide further evidence that concentration is not necessarily a good proxy for competition. Originality/value - Increased market concentration and its effects on competition are of relevance in a period of renewed EU regulatory efforts to remove the remaining barriers to the integration of financial markets. The evaluation of competitive conditions and market power in EU banking are therefore of interest to policy-makers and regulators.

Efficiency, ownership and financial structure in European banking: A cross-country comparison

Purpose - This paper aims to compare the cost efficiencies across bank-and market-based EU countries for the different groups of commercial, savings and co-operative banks; and between listed and non-listed banking institutions. In addition, it attempts to determine any potential implications for bank efficiency originating from differences in financial structure. Design/methodology/approach - Efficiency scores are estimated using the Battese and Coellis time-varying stochastic frontier approach. The classification of bank- and market-based financial systems is based on the World Banks Financial Structure Database. Findings - On the whole the results reject the agency theory hypothesis that managers of privately-owned banks are more cost efficient than those of mutual banking institutions because of capital market devices as it is found that mutual banks operating in EU-15 countries are significantly more cost efficient than commercial banks. Furthermore, results are mixed concerning the financial structure hypothesis that in developed financial systems bank efficiency should not be statistically different across bank-vs market-based economies. Research limitations/implications - The analysis suggests that differences in cost efficiency across bank types can often be explained by the prevailing financial system in each economy. Practical implications - The evidence illustrates the national diversity of corporate governance systems in Europe and can be important to policy makers who are concerned with the full integration of the European financial system. Originality/value - To the best of the authors’ knowledge, there are no previous similar empirical works for the EU banking sector. Such a study has important policy implications especially due to the fact that the EU banking sector is experiencing profound structural changes and a full integration has not yet been achieved.