The question of whether increased concentration and market power reduces firm cost efficiency may be particularly important to policy analysis of the banking industry. The recent wave of mergers among large banking organizations, particular "horizontal" or "within-market" mergers between banking organizations situated in the same local markets raises concerns about the increase in local concentration. If the "quiet life" and related efficiency-reducing effects of concentration are substantial, they might be considered in the merger approval process along with the traditional concerns about the welfare loss due to mispricing and the safety and soundness of the consolidated enterprise.

The authors estimate how bank efficiencies are affected by local market concentration, controlling for number of factors, including regions, state regulation, size, and corporate governance. The banks in the sample represent over two-thirds of all U.S. banking assets. The basic hypothesis tested is that the market power exercised by firms in concentrated markets provides a price "cushion" above the competitive level that allows firms to avoid the rigors of cost minimizing without necessarily exiting the industry.

The authors' empirical application suggests that market concentration does result in significantly lower cost efficiency. Extrapolating the results to the entire U.S. banking industry, they find that the operating efficiency costs associated with market concentration appear to be several times larger than the social losses due to the noncompetitive pricing of bank outputs, as measured by the traditional "welfare triangle."

The authors suggest that these results may have general implications regarding antitrust policy, and specific implications regarding regulation of the banking industry. If they hold up under further scrutiny, they suggest that antitrust and merger policy consider cost efficiency implications of impending mergers. Current Justice Department guidelines do not explicitly consider the possibility for laxity in cost controls that might be a results of increase in market power. The fact that banking mergers among banks in overlapping markets has not generally been found to improve cost efficiency could conceivably results from the efficiency costs of the higher concentration as measured here. That is, a reduction in market pressure to minimize costs may have offset the technical cost economies associated with the consolidations. These issues are important because so many regulatory issues involve changes in the degree of competition or market contestability.">

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Citations for "The Efficiency Cost of Market Power in the Banking Industry: A Test of the 'Quiet Life' and Related Hypotheses"

by Allen Berger & Timothy Hannan

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Cited by (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.):
  1. Allen N. Berger & Loretta J. Mester, 2001. "Explaining the Dramatic Changes in Performance of U.S. Banks: Technological Change, Deregulation and Dynamic Changes in Competition," Center for Financial Institutions Working Papers 01-22, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  2. Robert M. Adams & Lars-Hendrik Röller & Robin C. Sickles, 2002. "Market Power in Outputs and Inputs: An Empirical Application to Banking," CIG Working Papers FS IV 02-33, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  3. J. David Cummins & Sharon Tennyson & Mary A. Weiss, 1998. "Consolidation and Efficiency in the U.S. Life Insurance Industry," Center for Financial Institutions Working Papers 98-08, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  4. Ila M. Semenick Alam & Robin C. Sickles, 1997. "Long Run Properties of Technical Efficiency in the U.S. Airline Industry," CIG Working Papers FS IV 97-25, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
  5. Nakane, Marcio I. & Weintraub, Daniela B., 2005. "Bank privatization and productivity : evidence for Brazil," Policy Research Working Paper Series 3666, The World Bank. [Downloadable!]
  6. Mark Carlson & Kris James Mitchener, 2007. "Branch Banking as a Device for Discipline: Competition and Bank Survivorship During the Great Depression," NBER Working Papers 12938, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Thierfelder, Felix, 2008. "Rollover risk in commercial paper markets and firms‘ debt maturity choice," Discussion Paper Series 2: Banking and Financial Studies 2008,05, Deutsche Bundesbank, Research Centre. [Downloadable!]
  8. Allen N. Berger & Emilia Bonaccorsi di Patti, 2002. "Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry," Finance and Economics Discussion Series 2002-54, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Abbasoğlu, Osman Furkan & Aysan, Ahmet Faruk & Gunes, Ali, 2007. "Concentration, Competition, Efficiency and Profitability of the Turkish Banking Sector in the Post-Crises Period," MPRA Paper 5494, University Library of Munich, Germany. [Downloadable!]
  10. Jith Jayaratne & Philip E. Strahan, 1995. "The finance-growth nexus: evidence from bank branch deregulation," Research Paper 9513, Federal Reserve Bank of New York. [Downloadable!]
  11. Mark Carlson & Kris James Mitchener, 2005. "Branch banking, bank competition, and financial stability," Finance and Economics Discussion Series 2005-20, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Joseph P. Hughes & Loretta J. Mester, 2008. "Efficiency in banking: theory, practice, and evidence," Working Papers 08-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
  13. Mark Carlson & Kris James Mitchener, 2005. "Branch Banking, Bank Competition, and Financial Stability," NBER Working Papers 11291, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Allen N. Berger & Seth D. Bonime & Lawrence G. Goldberg & Lawrence J. White, 2000. "The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on De Novo Entry and Small Business Lending in the Banking Industry," Center for Financial Institutions Working Papers 00-12, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  15. Allen N. Berger, 2004. "Potential competitive effects of Basel II on banks in SME credit markets in the United States," Finance and Economics Discussion Series 2004-12, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  16. Frederic S. Mishkin, 2000. "Prudential Supervision: Why Is It Important and What are the Issues?," NBER Working Papers 7926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. O. Emre Ergungor, 2002. "Community banks as small business lenders: the tough road ahead," Working Paper 0203, Federal Reserve Bank of Cleveland. [Downloadable!]
  18. Atsushi Iimi, 2003. "Efficiency in the Pakistani Banking Industry: Empirical Evidence after the Structural Reform in the Late 1990s," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(1), pages 41-57. [Downloadable!]
  19. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  20. David Hauner, 2005. "Explaining efficiency differences among large German and Austrian banks," Applied Economics, Taylor and Francis Journals, vol. 37(9), pages 969-980, May. [Downloadable!] (restricted)
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  21. O. De Jonghe & R. Vander Vennet, 2007. "Competition versus Efficiency: What drives franchise values in European banking?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/491, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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  22. Mark J. Flannery & Kasturi P. Rangan, 2002. "Market forces at work in the banking industry: evidence from the capital buildup of the 1990s," Proceedings, Federal Reserve Bank of Chicago, issue May. [Downloadable!]
  23. Konstandina Natalia, 2006. "Probability of Bank Failure: The Russian Case," EERC Working Paper Series 06-01e, EERC Research Network, Russia and CIS. [Downloadable!]
  24. Olena Havrylchyk & Emilia Jurzyk, 2005. "Profitability of Foreign and Domestic Banks in Central and Eastern Europe : Does the Mode of Entry Matter?," Working Papers 2005-21, CEPII research center. [Downloadable!]
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  25. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1997. "The effects of megamergers on efficiency and prices: evidence from a bank profit function," Finance and Economics Discussion Series 1997-9, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  26. Alejandro Micco & Ugo Panizza, 2005. "Bank Concentration and Credit Volatility," Working Papers Central Bank of Chile 342, Central Bank of Chile. [Downloadable!]
  27. Simon H. Kwan, 2006. "The X-Efficiency of Commerical Banks in Hong Kong," Working Papers 122002, Hong Kong Institute for Monetary Research. [Downloadable!]
  28. Robert M. Adams & Lars-Hendrik Roller & Robin C. Sickles, 2002. "Market power in outputs and inputs: an empirical application to banking," Finance and Economics Discussion Series 2002-52, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  29. Styrin Konstantin, 2005. "What Explains Differences in Efficiency Across Russian Banks?," EERC Working Paper Series 01-258e-1, EERC Research Network, Russia and CIS. [Downloadable!]
  30. Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2003. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," NBER Working Papers 9890, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  31. Richard J. Rosen, 2001. "Do regulators search for the quiet life? the relationship between regulators and the regulated in banking," Working Paper Series WP-01-05, Federal Reserve Bank of Chicago. [Downloadable!]
  32. J. David Brown & John S. Earle, 2000. "Competition and Firm Performance: Lessons from Russia," William Davidson Institute Working Papers Series 296, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  33. Giroud, Xavier & Mueller, Holger M, 2007. "Does Corporate Governance Matter in Competitive Industries?," CEPR Discussion Papers 6446, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  34. Dean Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2002. "Consolidation and efficiency in the financial sector: a review of the international evidence," Finance and Economics Discussion Series 2002-47, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  35. Amparo Nagore & Joaquín Maudos Villarroya, 2005. "Explaining Market Power Differences In Banking: A Cross-Country Study," Working Papers. Serie EC 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  36. Richard J. Rosen, 2005. "Switching primary federal regulators: is it beneficial for U.S. banks?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 16-23. [Downloadable!]
  37. Steven J. Pilloff, 2002. "What's happened at divested bank offices? An empirical analysis of antitrust divestitures in bank mergers," Finance and Economics Discussion Series 2002-60, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  38. Pedro Fachada, 2008. "Foreign Banks' Entry and Departure: The Recent Brazilian Experience (1996-2006)," Working Papers Series 164, Central Bank of Brazil, Research Department. [Downloadable!]
  39. Allen N. Berger & Robert De Young, 2001. "The effects of geographic expansion on bank efficiency," Finance and Economics Discussion Series 2001-03, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  40. Allen N. Berger & Loretta J. Mester, 1999. "What explains the dramatic changes in cost and profit performance of the U.S. banking industry?," Working Papers 99-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  41. Allen N. Berger & J. David Cummins & Mary A. Weiss & Hongmin Zi, 2000. "Conglomeration Versus Strategic Focus: Evidence from the Insurance Industry," Center for Financial Institutions Working Papers 99-29, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  42. L.W. Punt & M.C.J. van Rooij, 1999. "The profit-structure relationship, efficiency and mergers in the European banking industry: an empirical assessment," WO Research Memoranda (discontinued) 604, Netherlands Central Bank, Research Department. [Downloadable!]
  43. Koetter, Michael & Poghosyan, Tigran, 2008. "The implications of latent technology regimes for competition and efficiency in banking," Discussion Paper Series 2: Banking and Financial Studies 2008,15, Deutsche Bundesbank, Research Centre. [Downloadable!]
  44. Unite, Angelo A. & Tabios, Guillermo Q. & Sullivan, Michael J., . "The Impact of Liberalization of Foreign Bank Entry on the Philippine Domestic Banking Market," Discussion Papers PASCN DP 2001-08, Philippine Institute for Development Studies. [Downloadable!]
  45. Paul W. Bauer & Allen N. Berger & Gary D. Ferrier & David B. Humphrey, 1997. "Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods," Finance and Economics Discussion Series 1997-50, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  46. Styrin Konstantin, 2005. "X-inefficiency, Moral Hazard, and Bank Failures," EERC Working Paper Series 01-258e-2, EERC Research Network, Russia and CIS. [Downloadable!]
  47. Simon H. Kwan, 2001. "The X-efficiency of commercial banks in Hong Kong," Working Papers in Applied Economic Theory 2002-14, Federal Reserve Bank of San Francisco. [Downloadable!]
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  48. Richard J. Rosen, 2002. "Is three a crowd? competition among regulators in banking," Proceedings, Federal Reserve Bank of Chicago, issue May. [Downloadable!]
  49. Hidenobu Okuda & Suvadee Rungsomboon, 2005. "The Effects of Foreign Bank Entry on the Thai Banking Market: Empirical Analysis from 1990 to 2002," CEI Working Paper Series 2004-20, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  50. Paul W. Bauer & Allen N. Berger & Gary D. Ferrier & David B. Humphrey, 1997. "Consistency conditions for regulatory analysis of financial institutions: a comparison of frontier efficiency methods," Financial Services working paper 97-02, Federal Reserve Bank of Cleveland. [Downloadable!]
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