Bank Performance: Market Power or Efficient Structure?

Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s, culminating with the Interstate Banking and Branching Efficiency Act of 1994. Significant consolidations have occurred in the banking industry. This paper considers the market-power versus the efficient-structure theories of the positive correlation between banking concentration and performance on a state-by-state basis. Temporal causality tests imply that bank concentration leads bank profitability, supporting the market-power, rather than the efficient-structure, theory of that positive correlation. Our finding suggests that bank regulators, by focusing on local banking markets, missed the initial stages of an important structural change at the state level.

[1]  Astrid A. Dick,et al.  Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance , 2006 .

[2]  Loretta J. Mester,et al.  Erratum to "Explaining the dramatic changes in performance of US banks: Technological change, deregulation, and dynamic changes in competition" [J. Fin. Intermed. 12 (2003) 57-95] , 2005 .

[3]  Philip E. Strahan,et al.  Competitive Dynamics of Deregulation: Evidence from U.S. Banking , 2003 .

[4]  S. Miller,et al.  Births, Deaths, and Marriages in the U.S. Commercial Banking Industry , 2002 .

[5]  R. Prager,et al.  The Geographic Scope of Retail Deposit Markets , 2002 .

[6]  S. Rhoades,et al.  Structure and Profitability in Banking Markets , 2002 .

[7]  S. Miller,et al.  Deregulation and Structural Change in the U.S. Commercial Banking Industry , 2001 .

[8]  Diana Weinhold,et al.  Causality Tests for Cross‐Country Panels: a New Look at FDI and Economic Growth in Developing Countries , 2001 .

[9]  Gaetano Carmeci,et al.  Fixed investment and economic growth: new results on causality , 2001 .

[10]  Kenneth J. Robinson,et al.  Consolidation, technology, and the changing structure of banks' small business lending , 2001 .

[11]  K. Stiroh,et al.  Explaining the Rising Concentration of Banking Assets in the 1990s , 2000 .

[12]  S. Rhoades.  Bank Mergers and Banking Structure in the United States, 1980-98 , 2000 .

[13]  Erik Heitfield.  What Do Interest Rate Data Say about the Geography of Retail Banking Markets? , 1999, The Antitrust Bulletin.

[14]  Allen N. Berger,et al.  The Consolidation of the Financial Services Industry: Causes, Consequences, and Implications for the Future , 1998 .

[15]  Lawrence J. Radecki.  The Expanding Geographic Reach of Retail Banking Markets , 1998 .

[16]  Philip E. Strahan,et al.  Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence From Commercial Banking1 , 1998, The Journal of Law and Economics.

[17]  Philip E. Strahan,et al.  The Benefits of Branching Deregulation , 1997 .

[18]  W. Frame,et al.  The Profit-Structure Relationship in Legally Protected Banking Markets Using Efficiency Measures , 1997 .

[19]  Allen N. Berger.  The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses , 1995 .

[20]  Kenneth R. Spong.  Banking regulation : its purposes, implementation, and effects , 1994 .

[21]  Allen N. Berger,et al.  The efficiency of financial institutions: A review and preview of research past, present and future , 1993 .

[22]  W. Newey,et al.  Estimating vector autoregressions with panel data , 1988 .

[23]  Douglas Holtz-Eakin,et al.  The Revenues-Expenditures Nexus: Evidence from Local Government Data , 1987 .