Efficiency and Market Power in Spanish Banking

Abstract

Some recent studies have been investigating the existence of market power in the European banking system, in general, and the Spanish banking industry, in particular. Although results are mixed, the evidence suggests some commercial banks and savings banks benefit from monopoly rents. Some other studies [Berger and Hannan, Review of Economics and Statistics LXXX (1998) 454–465] have also found strong evidence that banks in more concentrated markets exhibit lower cost efficiency levels. Our study merges these two groups of findings by exploring how cost and revenue efficiency measures for Spanish banks are related to the so-called return to the dollar (RD), whose advantage over other profitability measures lies on it being a ratio—in contrast to the additive structure associated with profit. This relationship is explored by considering nonparametric procedures, a set of techniques which is more consistent with those employed to measure efficiency in the first stage of the analysis. Results show that banks’ efficiency is differently related to the return to the dollar according to different circumstances. Specifically, for those firms whose revenues are lower than their costs, the relationship is positive. However, it turns to be negative for those banks with revenues above costs, suggesting that the “quiet life” might be a reality for those banks exerting market power. This finding is more apparent when decomposing efficiency into its different components (cost/revenue, technical, and allocative), since the relationship found is more obvious for allocative efficiency, either on the cost or revenue side.