Does Competition Lead to Efficiency? The Case of EU Commercial Banks

35 Pages Posted: 4 Aug 2008 Last revised: 23 Oct 2009

See all articles by Barbara Casu

Barbara Casu

City University London - Sir John Cass Business School

Claudia Girardone

Essex Business School - University of Essex

Date Written: January 15, 2009

Abstract

Using bank level balance sheet data for commercial banks in the major EU banking markets, this paper aims to shed some light on the recent developments in competition, concentration and bank-specific efficiency levels. Furthermore, using Granger-type causality test estimations, this study investigates the relationship between competition and efficiency. Results indicate that the main EU banking markets are becoming progressively more concentrated and less cost efficient. On average, banks seem to have reduced their marginal costs faster than price falls; this led to an increase in the Lerner index thus suggesting greater market power. However, our findings do not support Hick’s quiet life hypothesis as they indicate that an increase in banks’ monopoly power does not translate into a decrease in cost efficiency. On the other hand, results of the reverse causality tests provide no evidence that increases in efficiency precede increases in market power.

Keywords: Competition, Efficiency, Market Power, Granger Causality, EU Commercial Banks

JEL Classification: G21; D24

Suggested Citation

Casu, Barbara and Girardone, Claudia, Does Competition Lead to Efficiency? The Case of EU Commercial Banks (January 15, 2009). Available at SSRN: https://ssrn.com/abstract=1200362 or http://dx.doi.org/10.2139/ssrn.1200362

Barbara Casu (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Claudia Girardone

Essex Business School - University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206874156 (Phone)
+44 1206873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/ebs/staff/profile.aspx?ID=1045

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