Market Structure And Banking Production Economies: Evidence From The 1980s Deregulation (original) (raw)
Bank costs, structure, performance and regulation Evidence from the UK, 1981-1995
2001
Given the changes in the structure of the banking industry in the last two decades, the current study attempts to assess their impact on the costs and profits of UK banking industry, by use of a new data set covering the period 1981-1995. By utilising different methodologies we provide an insight into the robustness of the findings regarding different methodological specifications.
Journal of Banking & Finance, 1996
This paper examines the impact of the risk-based capital (RBC) requirements on bank cost efficiencies. We take into consideration both on-and off-balance sheet (OBS) products and allow product mixes to differ across banks and to vary over time. Our empirical results suggest that the cost structures of large banks are significantly different during the pre-RBC and post-RBC periods. That is, the RBC change seemed to reduce the optimal bank size that achieves maximum scale and scope economies, so that some of the large banks that previously were efficient became too large and inefficient. The results suggest that regulations that encourage large banks to expand their production and product mixes any further will likely result in a less efficient banking industry.
Cost and technical change: Effects from bank deregulation
Journal of Productivity Analysis, 1993
Banks were substantially deregulated during the 1980s. Interest costs rose faster than operating expenses (capital, labor) were reduced. As a result, measured technical change in banking was negative: it averaged-0.8% to-1.4% a year over 1977-88. Technical change was measured three different ways and for both equilibrium and disequilibrium factor input specifications. All three approaches-a standard time trend, an index approach, and shifts in cross-section cost functions-gave consistent results. These results were robust whether measured at the banking firm or office level, or at the cost frontier.
This paper examines the impact of the risk-based capital (RBC) requirements on bank cost efficiencies. We take into consideration both on-and off-balance sheet (OBS) products and allow product mixes to differ across banks and to vary over time. Our empirical results suggest that the cost structures of large banks are significantly different during the pre-RBC and post-RBC periods. That is, the RBC change seemed to reduce the optimal bank size that achieves maximum scale and scope economies, so that some of the large banks that previously were efficient became too large and inefficient. The results suggest that regulations that encourage large banks to expand their production and product mixes any further will likely result in a less efficient banking industry. JEL classification: G21; G28
Financial Deregulation and Economies of Scale and Scope: Evidence from the Major Australian Banks
Asia-pacific Financial Markets, 2001
In this study a parametric approach employing a flexible translog functional model is used to estimate economies of scale and scope in the four major Australian banks (ANZ, NAB, CBA and WESTPAC). Two hypotheses are tested to determine whether bank economies of scale have changed and also whether economies of scope were exhausted following financial deregulation. The analysis reveals that there is evidence for a continuing difference in banks' economies of scale as a result of deregulation. The empirical evidence also suggests that economies of scope were not exhausted by financial deregulation. In addition, there is continuing evidence of considerable economies of scope in the four major banks. In other words, Australian banks have not fully embraced deregulation and adjusted their joint production in a cost efficient manner. Findings in this study indicate that further deregulation would create a more competitive and efficient banking environment in Australia.
The role of scope and scale economies in recent large bank mergers
1992
The recent mega-merger activity in the u.s. banking industry raises many issues. Most important is the question of whether these mergers result in more profitable banks. A review of the literature on cost savings due to economies of scope and scale suggests that only those savings from the diversification of risk are present. The savings due to this diversification are substantial, but we also need to look at other areas of cost savings. Theories such as the information hypothesis, the market-power hypothesis, the inefficient-management hypothesis, and the too big to fail theory lead us to believe that the merging of these banks can substantially reduce costs. If the recent mega banks prove to be profitable, we may see the average size of banks increase. This may also lead to the dominance of a few super-banks, those that have already begun this trend.
A Reevaluation of the Market Structure Performance Relationship for Banks under Different Regimes
2001
The theory of relative market power hypothesis (RMPH) and the theory of efficient structure hypothesis (ESH) have radically contrasting implications for merger and antitrust policy. Advocates of the RMPH tend to see antitrust enforcement as socially beneficial, while advocates of the ESH tend to see policies that inhibit mergers as socially costly. Previous empirical tests of these hypotheses in banking have yielded mixed results. Important determinants of bank performance such as different regulation structures and bank size have not been simultaneously incorporated when analyzing these two hypothesis. This paper reexamine the structure-performance relationship for banks of different size under different regimes by using a stochastic cost frontier methodology to estimate both X-inefficiency and scale inefficiency scores for individual banks of different sizes that operate under different regimes. These inefficiency scores are then utilized to test RMPH and ESH. These tests, in turn...
Scale and scope economies in the multi-product banking firm
Journal of Monetary Economics, 1984
The multi-product nature of the banking firm is examined utilizing the translog cost function. This analysis indicates that, contrary to conventional wisdom, natural monopoly, scale economies and product-specific decreasing costs are not robust characterizations of the banking industry. There is, however, evidence that the cost function is characterized by economies of scope. The implications of these results are discussed and extensions of this approach suggested.
Too big to succeed? Banking sector consolidation and efficiency
Journal of International Financial Markets, Institutions and Money, 2014
This study examines the effect of banking sector consolidation on bank profit and cost efficiency using data from Japan. Our analysis shows that bank merger events have little impact on profit efficiency, but significantly lower cost efficiency. This suggests that government-coordinated consolidation of banks, especially in a post-crisis environment, results in less cost efficient entities, although the bottom line of profit efficiency is maintained. Our analysis of changes in banking sector competitiveness over the same period suggests that these merged banks are able to maintain their "bottom line" due to increased market power.
Market and policy analysis of the U.S. banking industry
Journal of Policy Modeling, 1994
Within the maximum entropy formulation for solving pure ill-posed prob!ems, an aggregated data set of the U.S. banking industry is analyzed. Under this formulation. technological and behavioral assumptions are not specified a priori, but are inferred from the empirical estimation procedure. The equilibrium characteristics of the industry together with the effects of different policies. economic measures. and changes in market conditions are investigated through experiments performed on the data. A main result shows that the industry is becoming more competitive. This paper analyzes the equilibrium size distribution and competitiveness of the U.S. banking industry. The issues of size distribution and competitiveness have had long-standing prominence in the banking policy literature. In contrast to other models, the formulation used in this paper does not require apriori assumptions on the characteristics of the industry's production function technology. The technology is inferred from the estimated size-distribution that serves as a measure of industry concentration and is used to estimate the impact of various policy and market conditions on the industry. Key issues for policymakers in the banking industry are understanding the natural tendency of the industry, the welfare implications of given levels of concentration, and the amount of time required to move from one level of concentration to another (Daughety
Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence From Commercial Banking1
The Journal of Law and Economics
This paper shows that bank performance improves significantly after restrictions on bank expansion are lifted. We find that operating costs and loan losses decrease sharply after states permit statewide branching, and--to a lesser extent--after states allow interstate banking. The improvements following branching deregulation appear to occur because better banks grow at the expense of their less efficient rivals. By retarding the "natural" evolution of the industry, branching restrictions reduced the performance of the average banking asset. We also find that most of the reduction in banks' costs were passed along to bank borrowers in the form of lower loan rates. JEL Classification: G2, L5 * We thank Dean Amel, Allen Berger, Rebecca Demsetz, Mark Flannery, Frederick Flyer, Beverly Hirtle, Randall Kroszner, Jose Lopez, Lawrence Radecki, Stephen Rhoades, Marc Saidenberg and Sonya Williams-Stanton for helpful comments. The paper has benefited from comments from seminar p...
The real effects of bank branch deregulation at various stages of economic development: The
2010
Abstract This paper provides evidence on the links between financial deregulation and economic performance in a European context. Specifically, we study the relaxation of bank branching restrictions in Spain which triggered off a remarkable inter-regional expansion of savings banks which has been coincidental with an unprecedented period of sustained growth. Although related questions have been largely investigated for the US, the European experiences remain largely unexplored.
Money Affairs, 2009
This paper employs a two-stage estimation procedure to evaluate the impact of bank concentration on performance. In the first stage of the estimation process, a stochastic cost frontier is estimated for the dominant commercial banks in Jamaica over the period 1989-2005, using both translog and Cobb-Douglas cost functions. The translog cost frontier model was found to be a more appropriate fit for the data. As such, efficiency estimates from this cost frontier model served as endogenous inputs in the second stage of the estimation procedure, where a VAR framework was employed to investigate the relationship between efficiency, concentration, and performance in the industry. The findings from the paper suggest that, on average, dominant banks in the industry would only need to reduce costs by 7.0 per cent in order to operate as efficiently as possible. Results from the VAR framework reject the structure-market-performance hypothesis. Rather, improvements in efficiency contribute to increased profitability for the dominant banks. However, improvements in efficiency for these dominant banks may not be reflected in their pricing policies due to the absence of strong competition in the sector. As such, there is further scope for initiatives geared at lowering interest margins and stimulating growth in the wider economy.
Journal of Applied Finance & Banking
Using an unbalanced panel dataset of 5,265 observations from 454 US banks including 394 commercial and 60 savings banks, and Battese and Coelli (1995) Stochastic Frontier model, this study has determined the recent level of cost and profit efficiency estimates of these banks and analysed the impact of specialization, ownership structure, and size on the cost and profit efficiency. The results reveal that the cost efficiency of US commercial and savings banks is statistically higher than the profit efficiency with a score of 92.1% and 63.59% respectively; the global financial crisis did not affect cost efficiency much, but it had a shattering effect on the profit efficiency; the savings banks are more cost efficient than the commercial banks and commercial banks are more profit efficient than savings banks; there is no significant differences between the cost and profit efficiencies of privately and publicly owned banks; foreign banks are less cost and profit efficient compare to the...
Do Financial Sector Reforms Improve Competition of Banks v1
The study investigated the market structure of Ghana's banking industry and determined whether the market structure has been changed after the financial restructuring. This study specifically measures the degree of competition of the banking system in Ghana by using the H-statistics. Various studies on the degree of competition were reviewed. This study employs a widely used nonstructural methodology put forward by Panzar and Ross (1987) -the H-statistic-and drawn upon a comprehensive average annual data from the various issues of the Bank of Ghana annual reports from 1988 to 2011. Based on the reported H-statistic, it can be concluded that Ghana's banks are operating under perfect condition. However, the test for a change in competition status at the time of liberalization was not significant, indicating no evidence of a change in competition as a result of liberalization. This study has extended and strengthened some earlier results on bank competition in Ghana. However, the results of this study are different from the study undertaken by , who found Ghanaian banking markets to operate under monopolistic conditions.