Luca Giordano

Analysis of the Italian Banking System Efficiency: A Stochastic Frontier Approach

The paper provides an analysis of some features of the Italian banking system during the decade 1998 – 2008. In particular, it focuses on the efficiency of Italian banks—in terms of parametric cost and profit functions—taking into account the dualistic structure which characterizes the Italian economy, the bank size, and the juridical form. During this period the Italian banking system has experienced a higher level of competition and significant ownership changes; these phenomena had a relevant impact on the performance of all banks. In particular, we found a reduction of differences in the efficiency between Northern and Southern banks. In addition, small banks exhibit a higher level of efficiency compared with the large ones. Finally, we observe that Mutual Banks improved in a significant way their performance compared with the banks organized as limited companies and cooperative. These results confirm the ability of local small Mutual Banks to effectively and successfully compete in the markets characterized by global operators. The reason for the continuing vitality of local banks is due to the fact that they offer a different product from large global banks and attract customers, specially small local firms, which external global banks would find difficult to serve.

Measuring the Efficiency of the Banking System in a Dualistic Economy: Evidence from the Italian Case

The paper provides an analysis of some features of the Italian banking system during the decade 1993–2003. In particular, it focuses on the efficiency of Italian banks – in terms of parametric cost and profit functions – taking into account the dualistic structure which characterizes the Italian economy, the bank size and the juridical form. During this period the Italian banking system has experienced a higher level of competition and significant ownership changes; these phenomena had a relevant impact on the performance of all banks. In particular, we found a reduction of differences in the efficiency between Northern and Southern banks. In addition, small banks exhibit a higher level of efficiency compared with the large ones. Finally, we observe that Mutual Banks improved in a significant way their performance compared with the banks organized as limited companies and cooperative. These results confirm the ability of local small Mutual Banks to effectively and successfully compete in the markets characterized by global operators. The reason for the continuing vitality of local banks is due to the fact that they offer a different product from large global banks and attract customers, specially small local firms, which external global banks would find difficult to serve.

Competition Versus Efficiency: What Drives Banks’ Spreads in Italian Banking System?

Economists have long debated the relationships between market structure of banking sector and the profitability. General consensus asserts that more concentrated market is associated with higher profitability: banks with higher market share generally achieve higher profits. This empirical evidence can however hinge on two opposite explanations: in the first case banks increase their market share (via mergers and acquisitions) in order to exploit the resulting stronger market power and impose higher prices to their clients; the second explanation tells that more cost-efficient banks are able to lower the prices applied to their clients and therefore to gain new clients and finally enlarge their market share. In both cases there is a positive link between market share and profitability, but in the former what actually plays a crucial role is a non-competitive force (Relative Market Power Hypothesis, henceforth RMP), in the latter the relationship is driven by the greater efficiency of banks which enlarge their market share by reducing prices (X-Efficiency Hypothesis, ESX). We run a 4-years panel data analysis (2008-2011) in order to disentangle the above alternatives hypothesis (RMP versus ESX) for the Italian market. First we estimate the cost efficiency for a sample of more than 200 banks by applying the Stochastic Frontier Analysis (SFA). In the second step we regress bank spreads on efficiency scores and market structure variables in order to identify which process leads the price setting of Italian banks. Difference in the legal organization of bank (mutual, cooperative, and commercial banks) and type of business relationships established are controlled for.