Peter S. Rose

A Canonical Analysis of Bank Performance

There have been many efforts in recent years to explain differences in the performance of commercial banks. Interest has centered on the extent to which changes in a selected group of indices of bank performance are related to the structure of banking markets and selected other factors thought to influence bank behavior. While various techniques have been used, the most common has been multiple linear regression. The measures of performance entered into the regression equations have included the price and quantity of bank services and bank profitability, while the explanatory variables have included, to name only a few, the one-, two-, or three-bank concentration ratio, the number of banks in the market, the existence of competition from nonbank financial institutions, bank costs, bank size, and proxies for the demand for banking services. Generalizations then have been made about the impact of market structure and other variables on bank performance, generalizations based upon the regression coefficients of the explanatory variables. The consensus appears to be that the demand for banking services and bank costs are significant determinants of the performance of individual commercial banks; market structure appears to be much less important. However, the conclusions are by no means unanimous.

Abstract–Banking Markets and the Measurement of Competition

The purpose of this paper is to examine various measures of the structure of banking markets and to relate these measures to selected indices of bank prices. To this point most studies in the field (and court rulings as well) have relied almost exclusively on concentration ratios and the number of banks as measures of market structure. However, these simple measures have important deficiencies which may lead to erroneous conclusions.