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On measuring concentration in banking systems

  • Alegria, Carlos
  • Schaeck, Klaus

Assuming a Pareto-type distribution of bank sizes, we investigate the effect of changes in Zipf's exponent ([alpha]) and the sample size on the behavior of different concentration indices, such as the 3-bank concentration ratio, the Herfindahl-Hirschman index and the top 5%-concentration ratio. We derive analytical relations between these concentration indices and investigate the elasticity of these indices to changes in [alpha] and in the sample size N. We show different regimes under which each index can be used most appropriately. Our results are highly relevant for policymakers who rely on such concentration measures to derive public policy recommendations in banking.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 5 (2008)
Issue (Month): 1 (March)
Pages: 59-67

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Handle: RePEc:eee:finlet:v:5:y:2008:i:1:p:59-67
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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  1. Frederic S. Mishkin, 1999. "Financial Consolidation: Dangers and Opportunities," NBER Working Papers 6655, National Bureau of Economic Research, Inc.
  2. Stanley, Michael H. R. & Buldyrev, Sergey V. & Havlin, Shlomo & Mantegna, Rosario N. & Salinger, Michael A. & Eugene Stanley, H., 1995. "Zipf plots and the size distribution of firms," Economics Letters, Elsevier, vol. 49(4), pages 453-457, October.
  3. Nicola Cetorelli, 1999. "Competitive analysis in banking: appraisal of the methodologies," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-15.
  4. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
  5. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 891-911, May.
  6. Okuyama, K & Takayasu, M & Takayasu, H, 1999. "Zipf's law in income distribution of companies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 125-131.
  7. J.A. Bikker & K. Haaf, 2001. "Competition, Concentration and their Relationship: an EmpiricalAnalysis of the Banking Industry," DNB Staff Reports (discontinued) 68, Netherlands Central Bank.
  8. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  9. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006. "Bank concentration, competition, and crises: First results," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1581-1603, May.
  10. Ramsden, J.J. & Kiss-Haypál, Gy., 2000. "Company size distribution in different countries," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 277(1), pages 220-227.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-3125498 is not listed on IDEAS
  12. Naldi, M., 2003. "Concentration indices and Zipf's law," Economics Letters, Elsevier, vol. 78(3), pages 329-334, March.
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