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Efficiency of financial institutions: International survey and directions for future research

This introductory article reviews past research on the topic of financial institution efficiency, surveys the contributions in this special issue, and suggests how future research on this important topic might proceed.

The efficiency of financial institutions: A review and preview of research past, present and future

Factors influencing the profitability of domestic and foreign commercial banks in the European Union

Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional "competition-fragility" view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the "competition-stability" view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.

https://papers.ssrn.com/sol3/Delivery.cfm/4696.pdf?abstractid=1243102

Bank Competition and Financial Stability

Under the traditional “competition-fragility” view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative “competition-stability” view, more market power in the loan market may result in higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. Even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. We test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. Our results suggest that—consistent with the traditional “competition-fragility” view—banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the “competition-stability” view—that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.

/pdf/bank-competition-and-financial-stability-4kaejzszws.pdf

Bank competition and financial stability

Evidence of the relative competitiveness of the banking industries in three Nordic countries is provided, by applying Data Envelopment Analysis of productivity on the national and the pooled data sets. The analysis produces a detailed account of how well banks from different countries and different sizes may be prepared to meet the more intense competition of a common European banking market.

Banking efficiency in the Nordic countries

The nonparametric frontier methodology is applied to a sample of banks, where output levels are measured either by the number of accounts and their average size, or by the total balances of the accounts. The efficiency rankings of individual banks are found to depend substantially on our choice of output metric, whereas the estimated size of potential productivity improvements in the banking sector are less affected. The results on economies of scale are also largely unchanged.

Technical efficiency of Norwegian banks: The non-parametric approach to efficiency measurement

The main purpose of this paper is to incorporate the oligopolistic nature of the banking industry into the (conventional) production model in order to contribute to the empirical literature on the structure, conduct and performance in banking and to achieve unbiased measures of scale economies and efficiency depending on which of the models is accepted by the data. This is done by appending behavioral equations specifying banks' conjectures regarding the reactions of other banks to its output change. This formulation enables us to test for the correct type of behavioral model and relate it to the resulting estimated technology. If estimates of economies of scale and inefficiencies depend on the behavioral model adopted, other studies which ignore product market behavior may well be subject to misspecification errors. The paper also sheds light on the nature of the oligopolistic interdependence in the banking sector. Copyright 1994 by Ohio State University Press.

Oligopolistic Interdependence and the Structure of Production in Banking: An Empirical Evaluation

The distinction between retail and corporate banking markets is of much importance in real life banking organizations. The two markets differ with respect to concentration, the importance of informational asymmetries, and the extent of customer mobility. Within a standard conjectural variation model estimated on cost efficient banks as well as on the full sample of banks, the authors empirically characterize the strategic behavior in each of these markets and also focus on cross market interactions to see whether initial moves in one market affect the equilibrium in the other market. They compare their findings to the predictions that would follow from merely considering concentration ratios, such as the Herfindahl index.

/pdf/banks-as-multioutput-oligopolies-an-empirical-evaluation-of-50g3arwtx3.pdf

Sigbjørn Atle Berg

Papers

Banking efficiency in the Nordic countries

Technical efficiency of Norwegian banks: The non-parametric approach to efficiency measurement

Oligopolistic Interdependence and the Structure of Production in Banking: An Empirical Evaluation

Banks as multioutput oligopolies: An empirical evaluation of the retail and corporate banking markets

A Four-Country Malmquist Index Analysis of Technical Efficiency in the Nordic Banking Sector