Banking Industry Structure, Competition, and Performance: Does Universality Matter?

California Institute of Technology Social Science Working Paper No. 1078

47 Pages Posted: 13 Dec 2000

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Date Written: October 2000


By studying the German universal banking system in the pre-World War I period, in comparison with its American and British counterparts, this paper investigates whether universality (the combination of commercial and investment banking services) influences banking industry concentration, levels of market power, or financial performance of banks. The short answer is "no". First, given that the UK's specialized commercial banking sector was structured very similarly to the German universal industrial banking sector, and that neither system was extremely concentrated in the pre-war era, the paper argues that universality does not necessarily or uniquely propagate concentration. Second, on average, German universal banks behaved no less competitively than their American counterparts in the provision of loan services. Structural price markup models, as well as reduced-form Rosse-Panzar tests, demonstrate little deviation from competitive pricing in either country. The findings therefore indicate that universality does not lead to appreciable market power, in either an absolute or a relative sense. These same results also imply that banking industry concentration, at least up to the moderately high levels found in Germany, does not in itself produce anti-competitive behavior. The empirical results, though contradictory to common wisdom about German universal banking, are easily motivated by the theoretical literature in industrial organization. Finally, estimates of returns on equity and on assets suggest only slight international differences in average returns over extended periods, but large deviations in individual years. Adjusting for prevailing rates on government bonds, commercial loans, or commercial deposits narrows the gaps further. Universality is not linked with superior profitability, whether the hypothesized source is efficiency (economies of scope) or monopoly power. These three sets of findings may assuage fears that deregulation in American banking could lead to excessive concentration and therefore collusive behavior. At the same time, the results may lower hopes of significant efficiency gains from broadening the scope of services.

Keywords: Financial institutions, universal banking, financial system design, competition, concentration, banking industry atructure, profitability, return on assets

Suggested Citation

Fohlin, Caroline, Banking Industry Structure, Competition, and Performance: Does Universality Matter? (October 2000). California Institute of Technology Social Science Working Paper No. 1078, Available at SSRN: or

Caroline Fohlin (Contact Author)

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

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Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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