Barbara Casu and Claudia Girardone
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.
Abstract
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 (H‐statistics and Lerner index) approaches.
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.
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Keywords
Claudia Girardone, John C. Nankervis and Ekaterini‐Fotini Velentza
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…
Abstract
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 Coelli's time‐varying stochastic frontier approach. The classification of bank‐ and market‐based financial systems is based on the World Bank's 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.
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Barbara Casu and Claudia Girardone
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…
Abstract
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.
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Solomon W. Giorgis Sahile, Daniel Kipkirong Tarus and Thomas Kimeli Cheruiyot
The purpose of this paper is to test market structure-performance hypothesis in banking industry in Kenya. Specifically, the structure-conduct-performance (SCP) and market…
Abstract
Purpose
The purpose of this paper is to test market structure-performance hypothesis in banking industry in Kenya. Specifically, the structure-conduct-performance (SCP) and market efficiency hypotheses were examined to determine how market concentration and efficiency affect bank performance in Kenya.
Design/methodology/approach
The study used secondary data of 44 commercial banks operating from 2000 to 2009. Three proxies to measure bank performance were used while market concentration and market share were used as proxies for market structure. Market concentration was measured using two concentration measures; the concentration ratio of the four largest banks (CR4) and Herfindahl-Hirschman Index, while market share was used as a proxy for efficiency. The study made use of generalized least square regression method.
Findings
The empirical results confirm that market efficiency hypothesis is a predictor of firm performance in the banking sector in Kenya and rejects the traditional SCP hypothesis. Thus, the results support the view that efficient banks maximize profitability.
Practical implications
The study provides insights into the role of efficiency in enhancing profitability in commercial banks in Kenya. It has managerial implication that profitable banks ought to be efficient and dispels the notion of collusive behavior as a precursor for profitability.
Originality/value
The paper fills an important gap in the extant literature by proving insights into what determines bank profitability in banking sector in Kenya. Although this area is rich in research, little work has been conducted in the developing economies and in particular no study in the knowledge has addressed this critical issue in Kenya.