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A Frontier Measure of U.S. Banking Competition

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  • Wilko Bolt
  • David Humphrey

Abstract

The three main measures of competition (HHI, Lerner Index, and H-Statistic) are uncorrelated for U.S. banks. We investigate why this occurs, propose a frontier measure of competition, and apply it to five major bank service lines using data only available since 2008. Fee-based banking services comprise 35% of bank revenues so assessing competition by service line is preferred to using a single measure for traditional activities extended to the entire bank. Academic-based competition measures explain only 1% of HHI variation. HHI merger/acquisition guidelines could be raised since current banking concentration seems unrelated to competition.

Suggested Citation

  • Wilko Bolt & David Humphrey, 2012. "A Frontier Measure of U.S. Banking Competition," DNB Working Papers 359, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:359
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    References listed on IDEAS

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    Cited by:

    1. Tsionas, Mike G., 2017. "Microfoundations for stochastic frontiers," European Journal of Operational Research, Elsevier, vol. 258(3), pages 1165-1170.
    2. Tsionas, Mike G., 2016. "Parameters measuring bank risk and their estimation," European Journal of Operational Research, Elsevier, vol. 250(1), pages 291-304.
    3. Tsionas, Mike & Malikov, Emir & Kumbhakar, Subal C., 2018. "An Internally Consistent Approach to the Estimation of Market Power and Cost Efficiency with an Application to U.S. Banking," MPRA Paper 85811, University Library of Munich, Germany.
    4. Bolt, Wilko & Humphrey, David, 2015. "Assessing bank competition for consumer loans," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 127-141.
    5. repec:spd:journl:v:67:y:2017:i:2:p:3-25 is not listed on IDEAS

    More about this item

    Keywords

    Competition; banks; frontier analysis;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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