Structure, performance and efficiency in European banking
This thesis examines the structure-performance relationship in the three largest European banking markets (U.K, France and W. Germany) and also investigates the related areas of economies of scale and X-efficiency. In Chapter 2, we describe the structure of the financial systems in the U.K, France and W. Germany identifying the different types of banks operating in each country and presenting the balance sheet structure of banks (by type of institution). In Chapter 3, we discuss the pre-1993 regulatory regimes prevailing in the three countries under investigation and we set out all measures and banking regulations proposed (E.0 Directives and Recommendations) to achieve the Single European Market in financial services. Chapter 4 contains a literature review of the s-c-p model and its applications to different banking markets. Chapter 5 investigates the nature of the relationship between market structure and bank profits and net interest margins. We adopt the theoretical framework introduced by Hannan (1991) and we suggest that total bank profits and net interest margins are a positive function of the level of concentration in every market the banks operate in. Overall, our results indicate that, at least in certain cases, various market shares do positively affect bank performance measures (bank profitability and net interest margins), suggesting that size in particular market segments may be important in generating higher bank profits. In Chapter 6, we empirically investigate the issue of economies of scale by estimating a standard translog cost functional form. Our empirical findings suggest that economies of scale are present across a broad range of outputs in all three banking markets under investigation, indicating that there are cost advantages associated with greater bank size. Chapter 7 tests the efficient structure hypothesis which suggests that bank efficiency rather than concentration is the factor that positively influences both market shares and bank profits. This hypothesis is tested by incorporating two measures of efficiency (X-efficiency and scale efficiency) directly into our s-c-p model. We estimate X-efficiency and scale efficiency using the stochastic cost frontier approach. Our results suggest that the two efficient structure variables do not help in the explanation of the variability of bank profits and, therefore, we find no evidence to support the efficient structure hypothesis. Finally, Chapter 8 presents our conclusion, suggests some policy implications and identifies the limitations of our study.