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Bank market concentration and efficiency in the European Union: a panel granger causality approach

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  • Cândida Ferreira

Abstract

The relationships between bank market concentration and bank efficiency are of particular relevance in the European Union (EU), but they remain controversial. Using a panel Granger causality approach, this paper contributes to the literature, testing not only the causality running from bank market concentration to bank efficiency, but also the reverse causality running from efficiency to concentration. The results obtained confirm the relative complexity of these causality relationships, although they generally point to a negative causation running both from concentration to efficiency and from efficiency to concentration. These findings are in line with the Structure Conduct Performance (SCP) paradigm and the suggestions that the increase of the banks’ market power will contribute to inefficiency, since these banks will face less competition to obtain more output results with less input costs. Our results suggest that within this panel of all 27 EU countries over a relatively long time period, from 1996 to the onset of the 2008 financial crisis, the more cost-efficient commercial and savings banks operated in less concentrated markets.

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Bibliographic Info

Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2012/03.

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Date of creation: Jan 2012
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Handle: RePEc:ise:isegwp:wp032012

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Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
Web page: https://aquila1.iseg.ulisboa.pt/aquila/departamentos/EC

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Keywords: Concentration; Efficiency; Granger causality; European banks.;

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  1. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
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  10. Maudos, Joaquin & de Guevara, Juan Fernandez, 2007. "The cost of market power in banking: Social welfare loss vs. cost inefficiency," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2103-2125, July.
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  14. repec:ebl:ecbull:v:4:y:2007:i:24:p:1-9 is not listed on IDEAS
  15. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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Cited by:
  1. Abou-Zeinab , Ali, 2013. "Patterns of Bank Credit Allocation and Economic Growth: The Case of Denmark, 1736-2012," Lund Papers in Economic History 131, Department of Economic History, Lund University.

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