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When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems

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  2. Economics, Finance, Business & Management
  3. Credit and Capital Markets – Kredit und Kapital
  4. Vol. 53, Issue 1
  5. pp. 43–80

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Richter, T., Müller, H., Gischer, H. When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems. Credit and Capital Markets – Kredit und Kapital, 53(1), 43-80. https://doi.org/10.3790/ccm.53.1.43
Richter, Toni; Müller, Holger and Gischer, Horst "When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems" Credit and Capital Markets – Kredit und Kapital 53.1, 2020, 43-80. https://doi.org/10.3790/ccm.53.1.43
Richter, Toni/Müller, Holger/Gischer, Horst (2020): When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems, in: Credit and Capital Markets – Kredit und Kapital, vol. 53, iss. 1, 43-80, [online] https://doi.org/10.3790/ccm.53.1.43
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When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems

Richter, Toni | Müller, Holger | Gischer, Horst

Credit and Capital Markets – Kredit und Kapital, Vol. 53 (2020), Iss. 1 : pp. 43–80

2 Citations (CrossRef)

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.53.1.43
Language
English
Pages
38
Keywords

Author Details

Dr. Toni Richter (corresponding author), Research Associate, Chair of Monetary Economics and Public Financial Institutions, Faculty of Economics and Management, Otto-von-Guericke-University Magdeburg, PO Box 4120, 39016 Magdeburg ­(GERMANY), +49 391 6758421

Prof. Dr. Holger Müller, Professor of Business Administration esp. Marketing, Faculty of Business Administration and Industrial Engineering, Leipzig University of Applied Sciences (HTWK), PO Box 301166, D-04251 Leipzig (GERMANY), +49 341 30766531

Prof. Dr. Horst Gischer, Chair of Monetary Economics and Public Financial Institutions, Faculty of Economics and Management, Otto-von-Guericke-University Magdeburg and Executive Director of the Forschungszentrum für Sparkassenentwicklung e.V. (FZSE), PO Box 4120, 39016 Magdeburg (GERMANY), +49 391 6758393

Cited By

  1. Zeitenwende in der Bankwirtschaft?

    Gischer, Horst | Kater, Ulrich | Rickes, Reinhold

    Vierteljahrshefte zur Wirtschaftsforschung, Vol. 92 (2023), Iss. 2 P.69

    https://doi.org/10.3790/vjh.92.2.69 [Citations: 0]

  2. Bankenwettbewerb und die Stabilität von Finanzsektoren

    Richter, Toni

    Zeitschrift für Wirtschaftspolitik, Vol. 70 (2021), Iss. 1 P.1

    https://doi.org/10.1515/zfwp-2021-2044 [Citations: 0]

References

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  48. Panzar, J. C./Rosse, J. N. (1987): Testing for ‘Monopoly’ Equilibrium, Journal of Industrial Economics, 35, 4, pp. 443–456.  Google Scholar
  49. Plearsikas, C. (2001): The analysis of market definition and market power in the context of rapid innovation, International Journal of Industrial Organization, 19, 5, 665–693.  Google Scholar
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  64. Anginer, D./Demirguc-Kunt, A./Zhu, M. (2014): How does competition affect systemic risk?, Journal of Financial Intermediation, 23, 1, pp. 1–26.  Google Scholar
  65. Ayadi, R./Schmidt, R. H./Valverde, S. C. (2009): Investigating Diversity in the Banking Sector in Europe: The Performance and Role of Savings Banks, Center for European Policy Studies, Brüssel.  Google Scholar
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  68. Beck, T./De Jonghe, O./Schepens, G. (2013): Bank competition and stability: Cross-country heterogeneity, Journal of Financial Intermediation, 22, 2, pp. 218–244.  Google Scholar
  69. Carbò-Valverde, S./Rodríguez-Fernández, F./Udell, G.F. (2016): Trade Credit, the Financial Crisis, and SME Access to Finance, Journal of Money, Credit and Banking, 48, 1, pp. 113–143.  Google Scholar
  70. Carvalho, D. R. (2014): The Real Effects of Government-Owned Banks: Evidence from an Emerging Market, The Journal of Finance, 69, 2, pp. 577–609.  Google Scholar
  71. Clerides, S./Delis, M. D./Kokas, S. (2015): A New Data Set On Competition In National Banking Markets, Financial Markets, Institutions & Investments, 24, 2–3, pp. 267–311.  Google Scholar
  72. Coccorese, P. (2014): Estimating the Lerner index for the banking industry: A stochastic frontier approach, Applied Financial Economics, pp. 1–38.  Google Scholar
  73. Delis, M. D. (2012): Bank competition, financial reform, and institutions: The importance of being developed, Journal of Development Economics, 97, 2, pp. 450–465.  Google Scholar
  74. Delis, M./Kokas, S./Ongena, S. (2016): Foreign Ownership and Market Power in Banking: Evidence from a World Sample, Journal of Money, Credit and Banking, 48, 2–3, pp. 449–483.  Google Scholar
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  78. Fu, X./Lin, Y./Molyneux, P. (2014): Bank competition and financial stability in Asia Pacific, Journal of Banking & Finance, 38, pp. 64–77.  Google Scholar
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  81. Hall, M./Tideman, N. (1967): Measures of concentration, Journal of the American Statistical Association, 62, 317, pp. 162–168.  Google Scholar
  82. Hirschman, A. O. (1964): The paternity of an index, American Economic Review, 54, 5, 761–762.  Google Scholar
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  84. Herfindahl, O. (1950): Concentration in the U.S. SteelIndustry. Dissertation. Columbia University, New York.  Google Scholar
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  86. Koetter, M./Nestmann, T./Stolz, S./Wedow, M. (2006): Still Overbanked and Unprofitable? Two Decades of German Banking, Kredit und Kapital, 39, 4, pp. 1–15.  Google Scholar
  87. Koetter, M./Vins, O. (2008): The Quiet Life Hypothesis in Banking – Evidence from German Savings Banks, Finance and Accounting Working Paper Series, 190.  Google Scholar
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  91. Berg, S. A./Kim, M. (1994): Oligopolistic Interdependence and the Structure of Production in Banking: An Empirical Evaluation, Journal of Money, Credit and Banking, 26, 2, pp. 309–322.  Google Scholar
  92. Berger, A. N./Klapper, L. F./Turk-Ariss, R. (2009): Bank Competition and Financial Stability, Journal of Financial Services Research, 35, 2, pp. 99–118.  Google Scholar
  93. Bertay, A. C./Demirgüc-Kunt, A. (2013): Do we need big banks? Evidence on performance, strategy and market discipline, Journal of Financial Economics, 98, pp. 626–650.  Google Scholar
  94. Bharat, N. A./Galetovic, A. (2006): Relationships, competition and the structure of investment banking markets, Journal of Industrial Economics, 54, 2, pp. 151–199.  Google Scholar
  95. Bikker, J. A./Haaf, K. (2002): Competition, concentration and their relationship: an empirical analysis of the banking industry, Journal of Banking and Finance, 26, 11, pp. 2191–2214.  Google Scholar
  96. Bikker, J. A. (2003) Testing for imperfect competition on EU deposit and loan markets with Bresnahan’s market power model, Research Series Supervision no. 52, Section Banking and Supervisory Strategies, Directorate Supervision, De Nederlandsche Bank.  Google Scholar
  97. Bolt, W./Humpfrey, D. (2015): A frontier measure of US banking competition, European Journal of Operational Research, 246, 2, pp. 450–461.  Google Scholar
  98. Boone, J. (2008): A new way to measure competition, Economic Journal, 118, 531, pp. 1245–1261.  Google Scholar
  99. Bresnahan, T. F. (1982): The Oligopoly Solution Concept is Identified, Economics Letters, 10, 1–2, pp. 87–92.  Google Scholar
  100. Brissimis, S. N./Delis, M. D./Iosifidi, M. (2014): Bank Market Power and Monetary Policy Transmission, International Journal of Central Banking, 10, 4, pp. 173–214.  Google Scholar
  101. Cãpraru, B./Andries, M. (2015): Nexus between concentration and fragility across EU banking systems, Procedia Economics and Finance, 32, 1, pp. 1140–1147.  Google Scholar
  102. Carbó-Valverde, S./Humpfrey, D./Maudos, J./Molyneux, P. (2009): Cross-country comparisons of competition and pricing power in European banking, Journal of International Money and Finance, 28, 1, pp. 115–134.  Google Scholar
  103. Leon, F. (2015): Measuring competition in banking: A critical review of methods, CERDI – Centre d’Études et de Recherches sur le Développement International, 2014.12, halshs-01015794v2  Google Scholar
  104. Smith, L. (2008): Report to the Secretary of State for Business Enterprise and Regulatory Reform, Standard Note SN/BT/4907, Office of Fair trading (UK).  Google Scholar
  105. Tirole, J. (1988): The Theory of Industrial Organization, The MIT Press.  Google Scholar
  106. Uchida, H./Tsutsui, Y. (2005): Has competition in the Japanese banking sector improved?, Journal of Banking & Finance, 29, 2, pp. 419–439.  Google Scholar
  107. Van Leuvensteijn, M./Bikker, J. A./Van Rixtel, A. R./Sørensen, C. K. (2011): A new approach to measuring competition in the loan markets of the euro area, Applied Economics, 43, 23, pp. 3155–3167.  Google Scholar
  108. Van Leuvensteijn, M./Sørensen, C. K./Bikker, J. A./Van Rixtel, A. R. (2013): Impact of bank competition on the interest rate pass-through in the euro area, Applied Economics, 45, 11, 1359–1380.  Google Scholar
  109. Weill, L. (2013): Bank competition in the EU: How has it evolved? Journal of International Financial Markets, Institutions and Money, 26, pp. 100–112.  Google Scholar
  110. Weistroffer, C. (2013): Niedrigzinsumfeld und Banken, Deutsche Bank Research, Aktuelle Themen, Globale Finanzmärkte, pp. 1–12.  Google Scholar
  111. Zigraiova, D./Havranek, T. (2015): Bank Competition and Financial Stability: Much Ado About Nothing?, William Davidson Institute Working Paper No. 1087, pp. 1–40.  Google Scholar
  112. Lerner, A. (1934): The Concept of Monopoly and the Measurement of Monopoly Power, Review of Economic Studies, 1, 3, pp. 157–175.  Google Scholar
  113. Liu, H./Molyneux, P./Wilson, J. O. (2010): Measuring competition and stability: recent evidence for European banking, Bangor Business School Working Paper, 57.  Google Scholar
  114. Love, I./Pería, M. S. M. (2014): How Bank Competition Affects Firms’ Access to Finance, World Bank Economic Review, 29, 3, pp. 413–448.  Google Scholar
  115. Mason, E. S. (1939): Price and Production Policies of Large-Scale Enterprise, American Economic Review, 29, 1, pp. 61–74.  Google Scholar
  116. Maudos, J./Fernández de Guevara, J. (2007): The cost of market power in banking: Social welfare loss vs. cost inefficiency, Journal of Banking & Finance, 3, 7, 2103–2125.  Google Scholar
  117. Panzar, J. C./Rosse, J. N. (1987): Testing for ‘Monopoly’ Equilibrium, Journal of Industrial Economics, 35, 4, pp. 443–456.  Google Scholar
  118. Plearsikas, C. (2001): The analysis of market definition and market power in the context of rapid innovation, International Journal of Industrial Organization, 19, 5, 665–693.  Google Scholar
  119. Schaeck, K./Cihák, M. (2013): Competition, Efficiency and Stability in Banking, Financial Management, 43, 1, pp. 215–241.  Google Scholar
  120. Schnabel, I. (2014): Das europäische Bankensystem: Bestandsaufnahme und Herausforderungen, Wirtschaftsdienst, 94, 13, pp. 6–10.  Google Scholar
  121. Shaffer, S./DiSalvo, J. (1994): Conduct in a banking duopoly, Journal of Banking & Finance, 18, 6, pp. 1063–1082.  Google Scholar
  122. Sealey, C. W./Lindley, J. T. (1977): Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions, Journal of Finance, 32, 4, pp. 1251–1266.  Google Scholar

Abstract

Economic studies on the degree of competition (DC) in banking systems use various measures which are subsumed under the 1) structure- (e.g. Herfin­dahl-Hirschman index), 2) conduct- (e.g. Boone indicator) or 3) performance-oriented approach (e.g. Lerner index). Yet, the respective empirical operationali­zations of the different DC measures are expected to represent one central construct – the true DC of a banking system. We review 35 studies covering 15 European banking systems from 1998 to 2007. Contrasting the central construct hypothesis, we find substantial differences in the produced DC measures. Thus, the economic validity of derived conclusions regarding the competition intensity is challenged.

Table of Contents

Section Title Page Action Price
Toni Richter / Holger Müller / Horst Gischer: When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems 43
I. Introduction 44
II. Background and Literature Review on Competition Measurements 46
1. The Structure-Conduct-Performance Paradigm: Conceptual Approaches and Subsumed DC Measures 46
2. Empirical Application of DC Measures in Academic Research: Proxies and Indicator 43
III. The Dataset 43
1. Sources (Studies), Dimensions, Data Points of the Database 43
2. Data (Pre-)Processing, Missing Data and Conversions 43
IV. Empirical Analysis 43
1. Analyses at the Approach Level: Aggregated S/C/P Values in DC Measurements 44
2. Analyses at the DC Measure Level (Disaggregated DC Values) 44
3. Analyses at the Indicator Level: A Critical Look at Specific DC Measure Applications 44
V. Discussion 45
References 45

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