Competition and Efficiency in EU27 Banking Systems

By Andries, Alin Marius; Capraru, Bogdan | Baltic Journal of Economics, Spring 2012 | Go to article overview

Competition and Efficiency in EU27 Banking Systems


Andries, Alin Marius, Capraru, Bogdan, Baltic Journal of Economics


Abstract

In our study, we investigate competition in the banking systems of the EU27 as a whole, but also in both old EU member states and new EU member states, in the context of European Union integration and enlargement. Specifically, we construct 2 measures of competition, the Lerner Index and H-statistics, using bank-level data for a panel of 923 commercial banks from the 27 countries that are member states of the EU. The results show a significant increase in competition in new EU members between 2001 and 2006, while in old member states we see a notable decrease in competition between 2005 and 2007. As a whole, competition in the EU27 increases comparatively with 2001, and we consider adoption of the euro and continuing European integration to be the main factors for this issue. Additionally, empirical results provide evidence of convergence in terms of banking competition among the member states of the EU.

JEL classification codes: G21; L11

Keywords: bank competition, Lemer Index, ?-statistic, convergence, european integration

(ProQuest: ... denotes formulae omitted.)

Acknowledgements

ThisworkwascofinancedbytheEuropeanSocialFundthroughSectoralOperationalProgramme Human Resources Development 2007 - 2013, project number POSDRU/89/1.5/S/59184 "Performance and excellence in postdoctoral research in Romanian economics science domain" and by the project "Studii Post-Doctorale in Economie: program de formare continua a cercetätorilor de elitä - SPODE", project number POSDRU/89/1.5/S/61755.

Helpful comments and suggestions from anonymous referees are gratefully acknowledged.

1. Introduction

Recent turmoil in the global financial system has impacted severely on the banking sector, with many banks suffering large losses and being forced to raise additional capital privately or through their national governments. Failure by investors, depositors, and supervisors to appropriately discipline banks has led academics and policy-makers to reconsider the links among bank performance, risk and changes in the competitive environment. Moreover, in recent years, indicators of banking competition have been used by researchers to explain performance and risk differentials across banks.

Intensified competition is one expected benefit of economic integration in the European Union. Competition is generally accepted as a positive influence in most industries, in that it is supposed to have a positive impact on an industry's efficiency. In 1957, the Treaty of Rome set a Single European Market for all goods and services. All discrimination based on nationality was to disappear. The 1992 Maastricht Treaty consolidated the single-market programme. A single European financial market implies that in any of the member states a financial institution of a European Union country is able to function on the basis of the functioning authorization issued by its own country. The First Banking Directive removed obstacles to providing services and establishing branches across the borders of EU member states, harmonized rules for bank licensing and established EU-wide supervisory arrangements. Later, in 1989, the Second Banking Directive on coordination of laws, regulations and administrative provisions dealt with the start-up and development of activity by credit institutions and aimed to create a single banking market by establishing the principle of mutual recognition of banking permits. The main advantages of the single market are: a) reduced prices for banking and financial services as a consequence of the increase of concurrency among financial institutions; b) general growth of economic efficiency as a result of reduction of the cost for banking and financial services used by companies; c) increase of access to larger categories of markets, instruments and services under the conditions of portfolio diversification and better risk monitoring; and d) greater efficiency of use of capital flows due to free movement. …

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