Market structure, performance and efficiency in european banking

Abstract

This paper explores the issue of efficiency in European banking. It tries to distinguish among the market‐structure and efficient‐structure hypotheses by incorporating into our empirical analysis measures of X‐efficiency and scale‐efficiency. Tests of the four hypotheses (the two market power hypotheses and the two efficient structure hypotheses) were performed by regressing measures of concentration, market share, X‐efficiency and scale efficiency against profits. Our empirical findings seem to suggest that the two efficient structure variables do not help in the explanation of the variability of bank profits and, hence, these results do not provide any support for the two efficient structure hypotheses. Our findings also indicate that big banks are more X‐efficient than small banks. This result seems to suggest that there are cost advantages associated with greater bank size.