On Measuring Concentration in Banking Systems

Posted: 17 Dec 2007 Last revised: 26 Mar 2008

See all articles by Klaus Schaeck

Klaus Schaeck

University of Bristol

Carlos Alegria

University of Southampton

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Assuming a Pareto-type distribution of bank sizes, we investigate the effect of changes in Zipf's exponent (à3B1) and the sample size on the behaviour of different concentration indices, such as the 3-bank concentration ratio, the Herfindahl-Hirschman index and the top 5%-concentration ratio. We derive analytical relations between these concentration indices and investigate the elasticity of these indices to changes in à3B1 and in the sample size N. We show different regimes under which each index can be used most appropriately. Our results are highly relevant for policymakers who rely on such concentration measures to derive public policy recommendations in banking.

Keywords: Zipf's law, concentration indices, banking

JEL Classification: G21, L16, C49, D31

Suggested Citation

Schaeck, Klaus and Alegria, Carlos, On Measuring Concentration in Banking Systems. Finance Research Letters, Vol. 5, pp. 59-67, Available at SSRN: https://ssrn.com/abstract=1074243

Klaus Schaeck

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Carlos Alegria (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

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