Competition in the German Banking Sector: An Empirical Analysis of the Concentration of Commercial Loan Origination
56 Pages Posted: 25 Feb 2005
Date Written: February 8, 2005
Over the last couple of years the banking industry has seen a remarkable trend towards concentration. The aim of this study is to examine this tendency and its consequences for the German market. We analyze commercial lending in Germany from 1970 to 2003 for all banks active on the German market, aggregated into 6 bank groups, and 8 broadly defined industries, covering most of the loan volume to domestic corporations.
Our paper extends previous studies on competition and concentration in banking in several respects. Firstly, we deviate from the commonly assumed homogenous product market assumption and treat loans made to different industries separately. Secondly, we introduce a new methodology, i.e. distance measures, to assess the loan market structure.
Overall, we find that concentration has increased and therefore competition decreased. Concentration of the bank groups' loan portfolios has also gone up except for the branches of foreign banks. The use of distance measures reveals that at the same time the bank groups' loan portfolios have become much more similar to the industry composition of the whole loan market. Concentration of the financing mixes of single industries has changed in different ways, while becoming closer to the market average.
Keywords: Competition, concentration, loan origination, banking
JEL Classification: G11, G14, G21, C43
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