Off-Balance Sheet Activities, Inefficiency and Market Power of U.S. Banks

88 Pages Posted: 17 Apr 2019

See all articles by David C. Wheelock

David C. Wheelock

Federal Reserve Bank of St. Louis - Research Division

Paul W. Wilson

Clemson University - John E. Walker Department of Economics; University of Texas at Austin - Department of Economics

Date Written: 2019-04-16

Abstract

The Lerner index is a well-established measure of firms' market power, but estimation and interpretation present several challenges, especially for banks. We estimate Lerner indices for U.S. banks for 2001-2016 while (i) accounting for banks' off-balance sheet activities, (ii) estimating cost and profit functions nonparametrically to avoid mis-specification inherent in parametric estimation of translog functions on banking data, and (iii) allowing for cost and profit inefficiency that can otherwise bias index estimates. We find that banks have more market power than previous studies found, and that failure to account for off-balance-sheet activities or inefficiency can seriously bias estimates of market power.

Keywords: banks, concentration, market power, nonparametric regression

JEL Classification: C12, C13, C14, G21, L13

Suggested Citation

Wheelock, David C. and Wilson, Paul W., Off-Balance Sheet Activities, Inefficiency and Market Power of U.S. Banks (2019-04-16). FRB St. Louis Working Paper No. 2019-12. Available at SSRN: https://ssrn.com/abstract=3373206 or http://dx.doi.org/10.20955/wp.2019.012

David C. Wheelock (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Paul W. Wilson

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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