Bank Competition, Concentration and Efficiency in the Single European Market
Essex Finance Centre Discussion Paper No. 05/02
28 Pages Posted: 16 Nov 2006
Date Written: 2005
The deregulation of financial services in the European Union, together with the establishment of the Economic and Monetary Union, aimed at the creation of a level-playing-field in the provision of banking services across the EU. The plan was to remove entry barriers and to foster competition and efficiency in national banking markets. However, one of the effects of the regulatory changes was to spur a trend towards consolidation, resulting in the recent wave of mergers and acquisitions. To investigate the impact of increased consolidation on the competitive conditions of EU banking markets, we employ both structural concentration ratios) and non-structural (Panzar-Rosse statistic) concentration measures. Using bank level balance sheet data for the major EU banking markets, in a period following the introduction of the Single Banking License (1997-2003), this paper also investigates the factors that may influence the competitive conditions. Specifically, we control for differences in efficiency estimates, structural conditions and institutional characteristics. The results seem to suggest that the degree of concentration is not necessarily related to the degree of competition. We also find little evidence that more efficient banking systems are also more competitive. The relationship between competition and efficiency is not a straightforward one: increased competition has forced banks to become more efficient but increased efficiency is not resulting in more competitive EU banking systems.
Keywords: Competition, Concentration, Efficiency, Profitability, EU banking
JEL Classification: G21, D24
Suggested Citation: Suggested Citation