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The Impact of Bank Size on Market Power

Author

Listed:
  • Jacob A. Bikker
  • Laura Spierdijk
  • Paul Finnie

Abstract

Over 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.

Suggested Citation

  • Jacob A. Bikker & Laura Spierdijk & Paul Finnie, 2006. "The Impact of Bank Size on Market Power," DNB Working Papers 120, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:120
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    References listed on IDEAS

    as
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    2. Jacob Bikker & Laura Spierdijk & Paul Finnie, 2006. "Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry," DNB Working Papers 114, Netherlands Central Bank, Research Department.
    3. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
    4. Jacob A. Bikker & Jaap W.B. Bos, 2005. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
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    Citations

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    Cited by:

    1. Jacob A. Bikker & Dirk W.G.A. Broeders & Dirk Jan de Dreu, 2010. "Stock Market Performance and Pension Fund Investment Policy: Rebalancing, Free Float, or Market Timing?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 53-79, June.
    2. Matousek, Roman & Nguyen, Thao Ngoc & Chris, Stewart, 2016. "Performance of the banking sector of a developing country: A non-structural model using the disequilibrium approach," Economics Discussion Papers 2016-2, School of Economics, Kingston University London.
    3. Jeon, Bang Nam & Olivero, María Pía & Wu, Ji, 2011. "Do foreign banks increase competition? Evidence from emerging Asian and Latin American banking markets," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 856-875, April.
    4. Jose Felix Izquierdo, 2017. "Modelos para los flujos de nuevo credito en España," Working Papers 17/09, BBVA Bank, Economic Research Department.
    5. J.A. Bikker & L. Spierdijk & P. Finnie, 2007. "The Impact of Market Structure, Contestability and Institutional Environment on Banking Competition," Working Papers 07-29, Utrecht School of Economics.
    6. Jose Maria Alvarez & Cristina Deblas & Jose Felix Izquierdo & Ana Rubio & Jaime Zurita, 2017. "The impact of European banking consolidation on credit prices," Working Papers 17/08, BBVA Bank, Economic Research Department.
    7. Jacob Bikker & Laura Spierdijk, 2008. "How Banking competition Changed over Time," DNB Working Papers 167, Netherlands Central Bank, Research Department.
    8. Horst Gischer & Toni Richter, 2011. "'Global Player' im Bankenwesen - ökonomisch sinnvoll oder problembehaftet?," FEMM Working Papers 110012, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    9. Li, Shaofang & Marinč, Matej, 2016. "Competition in the clearing and settlement industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 134-162.

    More about this item

    Keywords

    banking; bank size; competition; consolidation; market power; market structure; Panzar-Rosse model.;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • 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

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