Competition Versus Efficiency: What Drives Banks’ Spreads in Italian Banking System?

Academic Journal of Economic Studies, Vol. 1, No. 2, June 2015, pp. 93-119

32 Pages Posted: 8 Aug 2015 Last revised: 29 Jan 2016

See all articles by Luca Giordano

Luca Giordano

IOSCO (International Organization of Securities Commissions); CONSOB (Commissione Nazionale per le Società e la Borsa)

Antonio Lopes

Second University of Naples

Date Written: August 7, 2015

Abstract

Economists have long debated the relationships between market structure of banking sector and the profitability. General consensus asserts that more concentrated market is associated with higher profitability: banks with higher market share generally achieve higher profits. This empirical evidence can however hinge on two opposite explanations: in the first case banks increase their market share (via mergers and acquisitions) in order to exploit the resulting stronger market power and impose higher prices to their clients; the second explanation tells that more cost-efficient banks are able to lower the prices applied to their clients and therefore to gain new clients and finally enlarge their market share. In both cases there is a positive link between market share and profitability, but in the former what actually plays a crucial role is a non-competitive force (Relative Market Power Hypothesis, henceforth RMP), in the latter the relationship is driven by the greater efficiency of banks which enlarge their market share by reducing prices (X-Efficiency Hypothesis, ESX). We run a 4-years panel data analysis (2008-2011) in order to disentangle the above alternatives hypothesis (RMP versus ESX) for the Italian market. First we estimate the cost efficiency for a sample of more than 200 banks by applying the Stochastic Frontier Analysis (SFA). In the second step we regress bank spreads on efficiency scores and market structure variables in order to identify which process leads the price setting of Italian banks. Difference in the legal organization of bank (mutual, cooperative, and commercial banks) and type of business relationships established are controlled for.

Keywords: Bank, Spreads, Market Structure, Cost Efficiency, Market Power, Stochastic Frontier Analysis

JEL Classification: G21, L22

Suggested Citation

Giordano, Luca and Lopes, Antonio, Competition Versus Efficiency: What Drives Banks’ Spreads in Italian Banking System? (August 7, 2015). Academic Journal of Economic Studies, Vol. 1, No. 2, June 2015, pp. 93-119, Available at SSRN: https://ssrn.com/abstract=2640899 or http://dx.doi.org/10.2139/ssrn.2640899

Luca Giordano (Contact Author)

IOSCO (International Organization of Securities Commissions) ( email )

Calle Oquendo, 12
Madrid, Madrid 28006
Spain

CONSOB (Commissione Nazionale per le Società e la Borsa) ( email )

Roma 00198
Italy

Antonio Lopes

Second University of Naples ( email )

Via Antonio Vivaldi, 43
Caserta CE, 81100
Italy

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