The Impact of Bank Size on Market Power
AbstractOver the past few decades, the worldwide banking industry has undergone strong consolidation. As a result, the number of banks has fallen sharply. At the same time, the size of the largest banks has increased substantially, both in absolute figures and relative to the size of smaller banks. This paper analyzes the impact of this development on competition by assessing the relation between bank size and market power. We use an extended version of the Panzar-Rosse (P-R) model that allows bank size to affect market power. Based on a large sample of more than 18,000 banks in 101 countries comprising more than 112,000 bank-year observations, we show that market power varies with bank size. Large banks have substantially more market power than small banks in many of the countries under consideration, including the world's major economies and covering more than 85% of all banks in our sample. Our results contradict the common finding in the empirical P-R literature that competition increases with bank size. We show that misspecification of the P-R model in the existing literature leads to wrong assessment of the relation between market power and bank size.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 120.
Date of creation: Nov 2006
Date of revision:
banking; bank size; competition; consolidation; market power; market structure; Panzar-Rosse model.;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-16 (All new papers)
- NEP-BAN-2006-12-16 (Banking)
- NEP-COM-2006-12-16 (Industrial Competition)
- NEP-IND-2006-12-16 (Industrial Organization)
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