Market structure and efficiency in Swedish commercial banking, 1912–1938

Abstract

ABSTRACT This article investigates the link between market structure and performance in the Swedish commercial banking industry between 1912 and 1938. During this period, new market regulation was introduced with the intention to encourage large-scale banking. As a result, the industry entered a far-reaching consolidation phase. These market structure changes coincided with industrial development and progress. For this reason, it has commonly been assumed that the new regime fostered banks with capacity to efficiently supply the industry with financial services. However, hitherto, no comprehensive analyses on the actual impact of these policy changes on the performance of the banks have been conducted. We examine this impact by measuring the efficiency of Swedish commercial banks by constructing a Malmquist index based on technical efficiency scores derived from Data Envelopment Analysis (DEA). We use fractional regression analysis to examine the impact of market concentration and bank mergers on efficiency. We find that market concentration had a decidedly negative impact on the average efficiency of the Swedish commercial banking industry during this period. While large financial intermediaries may have been necessary to channel capital into the large-scale industrial and infrastructural projects of the time, it came at the cost of increased deadweight losses.