Testing for Competition in the Spanish Banking Industry: The Panzar-Rosse Approach Revisited

Abstract

The aim of this paper is to assess the level of competition prevailing in the Spanish banking system. The current analysis employs a widely used non-structural methodology put forward by Panzar and Rosse (1987) - the so-called H-statistic - and draws upon a comprehensive panel dataset of Spanish commercial and savings banks covering the period 1986-2005. Standard estimates characterize a hump-shaped profile for the H-statistic throughout the time span under consideration. Nevertheless, a weighted procedure is subsequently performed in order to control for firm size and the number of branches. The estimation outcome reveals a gradual rising path for the H-statistic, thus suggesting a more competitive environment among larger banks. In both settings, a noteworthy increase in the degree of competition is identified at the turn of the eighties, when several liberalization-oriented policy measures came into force. The aforementioned findings discredit the widespread hypothesis which states that concentration impairs competition.

Keywords: Banking, Competition, Panzar-Rosse, Market Structure

JEL Classification: G21, L13, L10