Universal versus functional banking regimes: The Structure Conduct Performance Hypothesis revisited

Abstract

In this study, we empirically investigate and critically reexamine the ‘Structure Conduct Performance Hypothesis’ for individual banks of various sizes that operate within the limits of universal and functional regulatory banking regimes, respectively. We employ a parametric Stochastic Cost Frontier model and obtain ‘X-Inefficiency’ and ‘Scale-Inefficiency’ score estimates for all representative individual sample banks. We utilise these particular inefficiency score estimates to test the ‘Relative Market Power’ and the ‘Efficient Structure’ hypotheses, respectively. Our empirical findings indicate support for the ‘Efficient Structure Hypothesis’ and suggest that in a rapidly growing, integrated and interdependent financial system, banks derive significant economic benefits when operating within the limits of the universal banking regulatory framework.