Journal of Banking and Finance 13 (1989) 6%79.

North-Holland

CONCENTRATION AND OTHER DETERMINANTS OF BANK PROFITABILITY IN EUROPE, NORTH AMERICA AND AUSTRALIA*

Philip BOURKE
University College Dublin, Dublin 4, Ireland
Received September 1986, final version received January 1988 This study reviews the performance of banks in twelve countries or territories in Europe, North America and Aus~ra!ia and examines the internal and external determination of profitability. To circumvent some of the difficulties in making comparisons between banks in different countries, the concept of 'value added' is introduced. Results parallel those in domestic U.S. studies and provide some support for the Edwards-Heggestad-Mingo hypothesis of risk avoidance by banks with a high degree of market power.

1. Introduction Many studies of the determinants of bank profitability in the United States have been undertaken~ including those which have focussed on the relationship between concentration and profitability and those which have examined the possibility of expense preference behavior existing in regulated and concentrated industries such as banking (see section 3). H_owever, the.re have been only three major studies of international bank profitability [Revell (1980), Short (!977, t979)'1. These works showed that it was possible to conduct a meaningful analysis in spite of the substantial differences in accounting practices and legal form between banks in various parts of the world. Of relevance also is the increased interest internationally in the effects of augmented competition and deregulation on banking systems and financial markets. This paper has the objective of further examining the determinants of international bank profitability and particularly of reviewing the relevance of expense preference behavior theories [Edwards (1977)] in this context. The Edwards-Heggestad-Mingo theory [Edwards and Heggestad (1973); Heggestad and Mingo (1976)] that higher concentration in banking markets encourages banks to hold less risky assets and to modify their behavior in
*The generous financial support of Allied Irish Banks for the research leading to this study is warmly acknowledged, as are the helpful comments of J.R.S. Revell, Brock K. Short, W.K. O'Riordan and R.P. Kinsella and an anonymous referee. 0378-4266,/89/$3.50 © 1989, Elsevier Sc/ence Publishers B.V. (North-HCland)

loan loss expenses and some overhead expenditures [:Short (1979). Holland. my approach and the conventional approach are both subject to disadvantages. The concept of value-added (in addition to accounting profit) is introduced to assist in overcoming some of the differences in accounting standards and to allow testing of the expense preference theories.d external to the bank. several factors have been suggested as impacting on profitability . the reciprocal of the liquidity ratio). Contrary to common practice. Bank profitability other ways is also examined. Finally in their exposition of the Galbraith-Caves hypothesis. Bourke. 2. California. circumstances but which may not be obtained in an international survey. Other variables for which data are available and which are suggested in the literature are capital and liquidity ratios. Hanweck and Humphrey (1982). Data collection The data is based on the financial statements of 90 banks each year in the ten years from 1972 to 1981 in twelve countries or territories . 3. Kwast and Rose (1982)].66 P. the loan/deposit ratio (in practice. Massachusetts. interest rates as a proxy for capital scarcity [Short (1979)1 and government ownership !'Short (1979)]. Denmark. Many of the internal determinants reviewed in the literature rely for their estimation on data which are available in limited local. Ireland. Short (1979)1 competition [-Phillips (1964). Determ|uants of bank profitability The literature divides the determinants of bank profitability into factors internal ar. Edwards (1977). External to the bank.Australia. New York. growth in market [Short (1979)]. ranked by total assets. Examples are funds source management and funds use management I'Haslam (1968)'1. Belgium. The banks included in the sample were every bank in these countries which fell within the top 500 banks in the world in June 1980. In so far as possible data were standardised to remove differences in local accounting practices particularly in relation to the treatment of reserves. Tschoegl (!982)]. Bell and Murphy (1969). c_oncentration [Rhoades (1977). Tucillo (1973)]. England and Wales. typically American. Norway and Spain. total assets are defined to include acceptances on both sides of the balance sheet. Canada. bank size and economies of scale ['Benston. Edwards and Heggestad (1973) and Heggestad and Mingo (1976) suggest that market power experienced by banking corporations may be translated into risk avoidance by way of a 'low risk' loan portfolio rather . Schuster (1984)'1. This is largely a matter of convenience as Spanish banks conduct a large part of their business through the acceptance mechanism.regulation [Jordan (1972).

for instance. interest rate restrictions. however. daunting as regulation is not readily susceptible of comparative measurement. the direction of any of these individual effects is unclear. credit ceilings. Bank profitability 67 than by being reflected in higher profits. For instance contestable market theory and indeed regulation theory in general point to the importance of barriers to entry in enhancing profitability while some of the other regulatory interventions may depress profitability. the literature has never adequately examined the consequences of changes in the intensity of regulation. it proved impossible to do this in a time series study extending over ten years. Some aspects of the literature. a matrix or tabulation of various regulatory interventions will assist us little in the attempt to measure the differential effects of regulation across countries. there is an implied assumption that within the U. as compared to international studies. The issues of regulation. While it may be possible to locate experts who are familiar enough with regulation in each of the sample countries to provide a comparative ranking for a pa:ticular year. n that regulation out~. domestic studies must have. The empirical problems of doing so are. 4. However. Accordingly. must be reviewed in some detail becaue of the differing emphases that U.1. ! will return to the question of entry barriers and related issues under the heading of Industry Structure but in the absence of a clear theoretical model. varies from country to country. however.S.P. the intensit/ of regulation is a constant. It has also been suggested that differences in the capital ratio could be . Regulation In relation to regulation. there may be a prcsump~lt.entry barriers.S.S. I considered several approaches and the most promising was a Delphi/Jury of Expert Opinion ranking of the intensivity of regulation on a !imited scale. Design of the model Testing of most of the variables described above as being represented in the literature does not present major difficulties. et cetera. 4. Seminar participants have proposed that the severity of regulation may be examined by constructing a matrix to investigate the presence or otherwise of various restrictions in different countries .~de the U.etic~n on banks and regulatory protection and profitability. They suggest that a lower level of service as measured in a variety of ways is detectable. competitive behaviour and concentration are related because as a referee of this journal has pointed out the source of the correlation between profitability and concentration may be a correlation between concentration ~. Bourke.nd regulatory prntp.

4. There is also the possibility. However. Of greater immediate relevance are the expense preference theories of Franklin Edwards (1974) who postulated that excess or supernormal profits of regulated industries may be diverted away from net profit into suboptimal expenditure patterns related to management as oppposed to shareholder preferenccs. more recent work casts doubts on the validity of these findings and in particular. 685) questions the conceptual appropriateness of the use of book value as a proxy for replacement cost but. Rhoades (1977) provides an extensive review of empirical work in this area. Panzar and Willig (1982)] with its emphasis on entry restrictions. in any case. this requires tMt market-derived cost of capital figures be first obtained and excess costs of capital be computed for banks in each country. Gilbert (1984).) Goodman (1984.68 P.the 'differential efficiency' hypotheses. in a critical review of the literature. that the super-normal earnings of firms in a regulated industry may be appropriated in the form of payroll expenditure.gnitude and state. usually because they are state owned. Aliber (1984. p. They examined the relationship between the average price-cost margin for industrial firms (sales less cost of materials less payroll expenses/sales) and concentration in two settings. wl~en . Industry structure Studies of mar~'et structure for the banking industry within the United States have a long history and in general the broad thrust of research work has been that concentration is positively and moderately related to profitability. (Q ratios relate the market value of the firm to its bock value. re of the banks in this sample. p.2. Bourke. suggests that earlier studies were unable to take advantage of the implications of the subsequent development of contestable market theory [Baumol. 670) suggests the use of Q ratios in examining changes in cost of capital for banks in different countries. Firstly. and no market capitalisation figures exist. many of the banks included in this survey are not publicly traded. relevant particularly in countries where the banking industry is unionised. ~a~k profitability used as a proxy for regulation on ~he basis that the r~mrket would equalise capital ratios for banks of the m~. He also summarises the evidence in favour of the proposition that the correlation between concentration and profitability may reflect superior efficiency among the larger firms rather than the use of market power . There is no direct evidence to date on this effect in banking markets but Chappell and Cottle (1984) report an experiment which has a bearing on the design of the present study. Secondly. when efficiency variables (in this case related to efficient plant size) were included they found that the price cost margin was positively related to concentration for the four largest firms but no significant relationship was found for the smal!er firms. However.

SmirlocK raises an important ca'~eat about his work. Oklahoma and Wyoming) and the extension of his approach to branching states (and obviously countries) may not be appropriate. These findings are difficult to interpret in the context of the industrial organisation literature in the sense that ATM diffusion might be regarded as competitive behaviour and accordingly the expected relationship with concentration should be negative.S. An industrial study by Peltzman (i97. In any case the absence of market share data for banks not included in my study makes Smirlock's approach unfeasible at this time. Missouri. New Mexico. however Chappell and Cottle's use of the price-cost margin approximates to my 'value-added' variables (see below).7) also found a significant negative correlation between changes in concentration aad . .regulatory in limited branching states but commercial and regulatory in other states. Having controlled ior factors such as wage costs. I have already raised the topic of barriers to entry in relation to the measurement of the effects of regulation and it must also be considered under the heading of market structure as Gilbert (1984) has pointed out.nit costs for industrial firms. Unfortunately the data required to support a similar study in the international banking sector is not available. An interesting study by Hannah and McDowell (1984) relates the rate of diffusion of automatic teller machines (ATMs) to several independent variables including concentration. His research is confined to limited branching states (Colorado. In his conclusion Peltzman notes that his findings are 'consistent with an eclectic view but one in which efficiency effects predominate'. however. On the other hand Rhoades and Rutz (1981) have shown a significant negative relationship between concentration and firm rank stability (which is itself a proxy for competitive behaviour) for U. they found that the rate of diffusion was positively related to concentration. Kansas. Smirlock (1985) takes this discussion a little further in the banking context in that he examines the effect of market shares and concentration on profitability and finds that market share rather than concentration has a significant and positive impact. Nebraska. that the findings are more in keeping with ~he 'differential efficiency' hypothesis in so far as dominant firms may have attained that position by continually investing in cost saving equipment. ! believe that this caveat may be related to differences in the nature of barriers to e n t r y . It is likely. Bank profitability 69 efficiency variables were included concentration is found to have an insignificant relationship to all firm sizes although interestingly the sign is negative.P. Bourke. They also found no significant relationship between concentration and market share in these markets. Contestable markets theory holds that the adverse welfare consequences of conce~tratic~l (if any) may be ameliorated if barriers to entry are not present. banking markets.

4. [See Tschoegl (1987) for a comprehensive discussion of the factors affecting foreign direct investment in retail banking. They also make the important point that studies of market structure must adequately define the relevant market which in the banking context includes non-bank financial intermediaries. paradoxically these barriers when they exist may well be more apparent than real. while many countries in this survey maintained formal entry barriers. but offer no empirical evidence. fringe entrants may shelter.70 P. almost all countries had ~xperienced a growth of potential competitors to traditionally organised banks .b~. For instance.] Baer and Mote (1985) present evidence that concentration is higher internationally than in the United States and within the United States is higher in branching than in non-branching states. He suggests that regulatory constraints are only one of many factors. Bank profitability Two questions arise. Bourke. Trustee Savings Banks in i'. submits that market leaders in concentrated industries take a significant portion of th. Their approach to market definition is similar to that adopted in my work.: potential profits latent in their position of market power in the f o ~ of . et cetera. What is the extent of regulatory barriers to entry? Does the existence of concentration in itself constitute an effective barrier. In summary.. p. United States. International evidence in the literature is also scant in relation to the question of whether concentrated m~rkets themselves constitute a barrier to entry. thrifts in the.3..nces data unavailability makes the testing of some promising concepts impossible for international markets. 417) suggest that concentrated markets may offer a price umbrella under which new.in some ins~.~ ~ocleties in Britain. particularly in retail markets? Looking firstly at the question of the existence of regulatory barriers. Additionally. Risk avoidance The Edwards-Heggestad (1973) and Heggestad-Mingo (1976) variant of the Galbraith-Caves hypothesis EGaibraith (1967)1. particularly in relation to foreign banks. the present state of the literature offers little clearcut guidance in relation tt~ the role of concentration in bank profitability determination ..'ew Zealand.2-:. there are very few examples of completely new entrants to banking markets attempting to compete in the retail sector and in fact examples are scarce of any form of retail activity transferring successfully across international frontiers in recent years. Ball and Tschoegl (1982. Ireland and Australia. as noted above. Spiller and Favaro (1984) -'resent evidence from Uruguay of changes in competitive behaviour among dominant banks when barriers to entry were lowered and local non-bank financial intermediaries were allowed to enter the market.

The steps taken in the data collection process to deal with these general problems have already been discussed but the ability to use the loan loss account as a means of building hidden reserves is common throughout all banking systems. Where parent banks and . 4. Bourke.S. Secondly. In the case of banking this avoidance of uncertainty largely takes the form of a reduced tisk profile on its loan book. Value-added measures Another general area which a successful model must encompass is the problem of the variability in accounting standards and reporting which may exist between various countries. 4.5. Summary of data and independent variables The data is a pooled t. by observing the relationships between net income before tax +staff expenses +loan losses and concentration. Two variants on this approach are used. Firstly. net income before tax + staff expenses + loan losses is a proxy for gross margin which is frequently unavailable on an international basis and allows the determinants of gross profit to be tested.s that this measure of value added largely removes the possibility of eith.'~ne series cross-section. Bank profitability 71 avoiding uncertainty.. net income before tax + staff expenses is used to test the expense preference theory on the basi. I believe that the foi~wing two measures of value added used are a reasonable proxy.. I suggest the concept of 'value added' as part of the solution process.6. In banking terms.-r managerially induced expenditure or labour union-negotiated wage demands appropriating excessive proportions of net income and allows the relationship between concentration and other inderendent variables and this dependent variable to be estimated. value added would be strictly defined as loan interest and other revenue less deposit interest and other non-wage expenses. banks) do not experience economies of scale [Benston. value added is usually *aken to mean the difference between selling price and all bought-in inputs excluding labour. comment may be made on the possible operation of the Edwards-Heggestad-Mingo effect. In the light of international data problems. Short (1979) tested for this variable but obtained no significant results. 4. Hanweck and Humphrey (1982)]. Tschoegl (1983) a13o confirms this result for the 100 largest banks in the world from 1969 to 1977.P.4. it is not proposed to test for economies of scale. In industrial terms. As a step towards dealing with this general problem. Accordingly. Additionally. Economies of scale The literature is reasonably clear that larger banks (across a broad range of magnitudes for domestic U.

I tested the relationship betw~n profitability as defined in the several ways described below and the following independent variables: Staff expenses. whose reliability in the data was not felt to be adequate. Capital ratios.S. New York and Massachusetts. given the ability of corporate customers to source their financial requirements on a geographically disperse basis.72 P.~ had found a positive relationship between nominal interest rates and return on capital. work. The extent to which total assets or deposits of the banking system provide an adequate market definition is also an issue. Liquidity ratio. i. In relation to my research. the unconsolidated results from the parent are used. The three bank concentration ratio is used. This assumption was also made by Short (1979) in his classic study already cited. buidling societies.] The market share of either deposits or total assets in a particular country is determined by the sum of deposits or total assets of the top three banks (as obtained from their published financial statements) as a ratio of the deposits or total assets of the banking system including non-bank financial intermediaries. however.e. Bank. Shor. research because the presence of exchange risk must operate to provide a less porous market than would be the case in relation to the SSMA markets normally used in U. capital including reserves as a percentage of total assets. such as thrifts. I suggest that this problem is less severe in an international study as opposed to domestic U. the concentration basis being taken as the share of largest three banks of either total deposits or assets. the ratio of liquid assets to total assets.e. both in their own right and as a proxy for overhead expenses generally. [See Rhoades (1977) for a review of the relative merits of both the three bank concentration ratio and the Herfindahl Index. Data availability also made impracticable the use of the Herfindahl ratio even in its truncated form. depending on data availability. a dummy variable representing the ownership status of each bank is incorporated. The reciprocal of this ratio can also be used as a proxy for the loan/deposit ratio. given that the largest banks in each country are well known international banks.Interest rates. interest rates b~ing used as a proxy for - . Bourke. Short (1979) had found that the government ownership of banks is correlated inversely with profitability and. et cetera (obtained from the Annual Reports of Central Banks for each country). The assumption inherent in this methodology is that the top three banks in each country have approximately the same proportion of foreign business in their portfolios which. accordingly. Concentration ratio. profitability subsidiaries are both included in the data. . the potential criticism remains valid in relation to California.S. i. may not be an unreasonable assumption. .Government ownership.

which is not unusual and.he had used it to control for banks' managements who were growth. in so far as it is discussed. 4.8. It is possible that interest rates have a direct influence on profitability and this will be tested in the context of return on assets as the dependent variable. (a) Return on capital. comes to. (0 The ratio of net income before taxes+staff expenses to total assets. particularly if associated with entry barriers. should produce the capability of earning increased profits. as opposed to profit. Short (1979) investigated this question and concluded that 'linear functions produced as good results as . Functionalform of the eguation The literature generally. Short found that asset growth in individual banks was not significant . Revell (1979) has suggested that inflation may be a factor in the causation of variations in baek profitability although this is not widely discussed in the literature elsewhere. (i0The ratio of net income before taxes+staff expenses + loan losses to total assets. Its effect depends on the assumption that wages and other non-interest costs are growing faster than the rate of inflation. However. The use of market growth as a variable is not suggested extensively in the literature. (c) Value added return on total assets.7. It is suggested that growth in total market may be considered as a potential variable in the sense that an expanding market.Inflation. Net income before and after tax as a ratio of total capital including all reserves. Dependent variables The following general categories of dependent variables were used. Net income before tax as a ratio of total assets. Accordingly. . the conclusion that the appropriate functional form for testing is a linear function although there are dissenting opinions. The ratio of after-tax profits to capital was used by Short (1979). the annual growth in the consumer price index in each country is used as an independent variable. annual growth in money supply in each country is suggested as an independent variable. (b) Return on assets.P. Bourke. Bank l~rojJtGbility 73 capital scarcity although it may have been more appropriate to use real interest rates. A further variable is defined as the ratio of net income before tax to capital+total borrowings (as a proxy for subordinated loan stock which is used in substitution for equity capital). accordingly. maximisers. - 4. Market growth.

Cho and Krishnan (1986). 1 when a bank is owned by a government.'m bond rate for each country for each year (IMF). The White (1980) heteroskedasticity test (a variant of which is available on the Shazam econometric package) confirmed the absence of heteroskedasticity problems in the international data. national or provincial. CRTA CBINVTA : Capital and reserves as % of total assets.S.. CONC : Three bank concentration ratio. INT : The long-t¢. BTSETA . are the independent variables as described above.] 4. c is the constant term. MacKinnon (1985) specification test was also applied with results that supported the use of the linear function. BTCRTB : NPBT as/o/ o f c:pital and reserves + total borrowings. Variable names The variable names are as follows: 4.1. zero . and x~ to x.9. Bourke. NPAT = Net profit after tax). o BTTA NPBT as % of total assets. In addition.otherwise. BTSEPLTA : NPAT + staff expenses + provision for loan losses as % of total assets. . ATCR NPAT as % of capital and reserves. Dependent variables (NPBT = Net profit before tax.9. 4. it is proposed to test using a linear function of the form: y = c + a t x t +azx2 +aaxa. [For an interesting discussion of some related econometric issues in a study of international iocation decisions of U. Independent variables GO VT : A dummy variable :epresenting government ownership.74 P..anxn. see Nigh. NPBT + staff expenses as % of total assets. The Davidson. MON :Growth in money supply for each country for each year (IMF).. :Cash and bank deposits+investment securities as % of total assets. there is no evidence of any intertemporal error correlation structure nor of any significant difference in the intercept terms by year or by country.9. where y is the dependent variable.2. Godfrey. banks. BTCR NPBT as % of capital and reserves.. Bank profitability any other functional form'. Accordingly.

01 0. eq. Constants omitted. Resuhs Findings are reported in tables 1 and 2. Bourke. (!)--(5) were reestimated on a year by year basis for years 1981.1 0. Additionally. However.03 =-0. 1979.~cai. bSignificant at 5% level .1 =-0~09 =-0. CPI SE • Percentage increase in consumer price index for each country for each year (IMF). Table 1 replicates Short's work to a greater or lesser extent depending on the particular equation examined• However.27 "--0. In addition to the inherent data collection problems of the present work which have been described. Bank profitabilif y Table 1 Estimates of the relation between return on capital a n d selected independent variables.05 n 0.6 " N u m b e r of observations for each equation: 116.71 b 0. However.003 BTCR BTCR BTCR ATCR BTCRTB BTCRTB =-0.15 b 0.52.17 b 0.03 INT 0.04 b 0." 75 GOVT (I) (2) (3) (4) (5) (6) CONC 0.6 =-0.06 0. 1976 and 1973 with results in line with those of the time series with equally poor explanatory power.25 b - R2(adj) 0.04 0. (4) in table 1 is the exact equivalent of Short's sixth equation (1979) which he expressed as follows (using the variable names in table 1): ATCR=2. aSignificant at 5% level• The almost total lack of correspondence between the present results and those of Short are surprising and are difficult to explain.6INT" R 2 =0.1 0. the following comments may contribute to an understanding of the differences.P.3 b 0. the effects of Short's averaging of profit returns would be to reduce the variability in report profit figures a~Jd thereby presumably provide more si~.1 0. Short faced further difficulties: (a) Short's profit data related to a three year average rather thaa to the ten year time span of the present work.O3CONC'+O.t statistics omitted for reasons of space.36GOVT~+O.07 MON 0.3 b 0. t regression result: than in mine. eqs. • Staff expenses as % of total assets• 5. .1 0.04-2.

For instance. only five banking markets are common to both (Belgium.g. It had been postulated that if. liquidity ratios and interest rates as being positively related to profitability. In line with findings in other parts of the ~iterature. Germany. However. Massachusetts and New York). The results in relation to liquidity ratios are less expected as conventional wisdom is that liquidity holdings (particularly if imposed by government) represent an ~xpense to banks. Of ShoWs sample of 60 banks. The . The results sho~n in table 2 all relate to a~set (as opposed to capital) based returns and. Italy and Switzerland. when used in equat_ions having one of the measures of value added as dependent variable. (c) While a greater number of countries are included. Denmark. I understand from Dr. banks enjoyed and practised the privilege of hidden reserves.his sample substantially increases the mean and reduces the standard deviation of his H values which may help to explain my lower R 2 adj. More importantly. It is also possible to speculate that well capitalised banks enjoy access to cheaper (because less risky) sources of funds or that the prudence implied by high capital ratios is maintained in the loan portfolio with consequent improvement in profit rates. England and Wales and Holland) and some important markets are present in ShoWs sample but not in mine (France. et cetera) frcm . Short that removing the above five countries (France. figures in table !~ (d) ~veral countries are included in ShoWs sample where financial statement information is notoriously unreliable. Belgium is represented by two banks as opposed to eight banks in the present work. Canada.K.76 P. the sign of the relationship change~ to an inverse relationship. while several of the U. e. e. The finding in relation to capital ratios . Germany.~s to be expected as. Japan and Switzerland) and vice versa (California. Bank profitability (b) The data sources used were secondary. concentration is shown to be moderateiy and positively related to pre-tax return on assets. show capital ratios. The results in relation to concentration require some consideration. Italy. Germany. in general.~nses show an inverse if weak correlation with pre-tax return on z~sets.g almanacs as opposed to bank financiai statements. Bourke.~p strengthen in the case of the dependent variable BTSETA (net income before ~ax + staff expenses as ratio of total assets). the sign of the relationship would remain positive and the relationsh. capital represents a 'free' resource and Revell (1980) had noted an inverse relationship between capital ratios and costs of intermediation. As was expected. staff exp. 21 banks are subject to these problems. the number of banks from each country in the sample was small. in accounting terms. for instance. support were to be shown for the expense preference theories.

al.ID . Bank profitability 77 8 D~ml.ID JD J~ ~L 0 .ID S I I I I I i I I @ i 8 i . Bourke.I I I I I I I I I I I I I .P.@ 'i ~- ]- .

The decision io establish a foreign bank branch or subsidiary: An application of binary classification procedures.. Chappell. Bearing in =-m'nd that the . John C.. The results are. and Banking 16. Federal Reserve Bank of Chicago 9. May. and Banking XIV. Willir. 6. no. Journal of Financial and Qualitative Analysis XVII.Related profits. market and support is found for Me Edwards-Heggestad-Mingo hypothesis. Benston.A survey. The Review of Economics and Statistics. 19"t9. International banking . Scale economies in banking. Gerald A. staff expenses are squeezed. Baak peof~a~l~tF change of the sign of the concentration variable implies that. Clifford A. William J. Contestable markets and the theory of industrial structure (Harcourt Brace Jovanovich. Herbert and Larry R. Baer.S. Robe./Feb.78 P. no. 1982. Humphrey. as concentration increases.they hypothesised that higher levels of concentration were associated with lower levels of loan portfolio risk. 4. part 2. 1982. Southern Economic Journa| 51. Journal of Money. Additionally. Cottle. no. 1982. Nov. 4. Bell Frederick W. Credil. that higher levels of concentration arc associated with lower loan loss cost~ An immediate connection to the Edwards-Heggestad finding may be m a d e . in addition to that observed in relation to the BTSETA/CONC relationship.'affable BTSELPTA is a reasonably close proxy for gross margin. 1984. Sources of concentration . however. Nov. 1969. Economic perspectives. no. and Rex L.rt Z. Hanweck and David B. 1. Mote. 1984. Support for this contention is found in Heggestad and Mingo (1976) who found that higher levels of concentration were associated with lower levels of service (and presumably lower staffing costs). New York). William F. 4. a Federal Reserve Board study. Jan. and Nell Mushy. No support is found for expense preference expenditure theories. C ~ ~ The findings of Short's study are not confirmed except in the most general sense.. Ball. The effects of nationwide banking on concentration: Evidence from abroad. 3. Identical equations were estimated on a cross-sectional basis for the years 1981. cited by Almaffn Phillips (1964) found a slight but significant tendency for the rates charged by a bank to decrease as its market share inc. in agreement with concentration and bank profitability studies for the domestic U. References Aliber. Baumol.--cascd. part 1.. In relation to the dopendent variable BTSEPLTA (net income before tax + staff expenses + loan losses as ratio of total assets) a similar phenomenon is evident as the sign of the CONC variable changes which carries the implication. 1976 and 1973 with little important differences in findings to those reported in table 2. Sept.. Bourke. Impact of market structure on the price of a commercial banking service. . 1985. no. the present findings arc not in contradiction with the results of the previous work. Credit. George J. Panzar and Robert D. and Adrian Tscboegl. Journal of Money.

Rhoades... The relation between commercial bank profit rates and banking concentration in Canada. 1984. banking involvement abroad: An empirical examination. London). Oct.. The Galbraith--Cav~ hypothesis and managerial motives in ~ ~ y Journal of Economics LXXXVII. Douglas. Intlation and financial institutions (Financial Times. Revell.K. Summer. 1982.aology in the banking industry. 1984. Russell. P~b!~ T. Gilbert. Nigh. Willi~an A. Rhoades. prior market s~a'ucture and the effec~ ul-~" government ~gulafion" Journal of Law and Economics 15. 1973. Brock. Was "l~ngton" DC). Stephen A. Jack. market size and performance: Some evidence from outside the United States. 1976. A heteroskedasticity consistent covariance matrix estimator and a direct test for heteroskedasticity. 4. A reexamination and extension of the relationship between concentration and firm rap2 stability.. The Review of Economics and ~. 1. Franklin R~ |977. 1. Halbert. Credit. Srairlock.ercial banks. Spl~!er. Structure and performance studies in banking: A summary and evaluation. no. Pads). 4.~tab~ity Davidson. Reveli. and Edgardo Favaro. Aug. lnternafion~ Economic Review 26. Tucillo. $ourn~ of M ~ . A statistical analysis of the relative profitabi~ty of comrr~'rcial banks.d. Boston" MA~. Taxation by regulation: The case of financial intermediaries. 2. Journal of Finance.A s L ~ p ~ v ~ o n of the differencing test. Producer protection. Frank~ R. Adrian E. Journal of Finance 23. Nov. Competition. 3. Stephen A. no. Feb. Edwards. Jov~. Journal of Business 56. no. 3. Mimeo. 1985. Credit. no. Galbraith. Timothy H. Journal of Bank Research. DC}. no. F. nonprices and concentration in comwnercial banking. Comment on international banking: A sur'¢ey. 3. Statistics 63. Adrian E. Fall. Michael. Kwast. Journal of Money.. Laurie S. Journal of International Business Studies. Concentration among international banks .R. Brock K. McDowefl. 1979.. International ~ statistics {IMF. International retail banking as a strategy: An assessment. operating efficiency and profitability among large comw. Rose.. Econometrica 48. no. Pricing. M a n 2 ~ a l o b ~ i v e s in r ~ a t e d i n d u s t ~ : Exper~se pce~%rence behavior in banking. Evidence on the (non) relationship between concentration and profitability in banking. no. Journal of Political Economy.. Western Europe and Japan. Washington. Bank concentration. 1983. 4. Arnold A. The gains and loss~_ from indust_rial concentration. Short. The role of location-related ~ r s in U. Heggestad. Adrian E. 4. Journal of Banking and Finance 6. International Monetary Fund. The new industrial state (Houghton M i e n . (IMF. marke~ ~ e and perfo~ance:..S. Short.. Nov. MacKinnon. no. 1984. Hasla~ John A. 1980. Prior. The Review of Economics and Statistics 66.. Jou. 1984..al of Banking and Finance 6. Mar. Credit. . 1979. Bell Journal of Economics. Kang Rae Cho and Suresh Krishnan" 1986.. 1977. Journal of Law and Economics XX. 1982. and Roger D. and John J. Goodman. and Baaking 17. 2.S. Journal of Banking and Finance 3. Hegges'ml. Size. and Banking 16. ~ . growth and transnationality among the world's largest banks. ~ ~. J. S. Summer. and John T. Aimarin" 1964. Mingo. 1980. Uncertainty. Peltzman.LeslieGo~rey and J~es G.-aal of International Business Studies. Tschoegl. 2. no. and Banking 16. Washington. Costs and margins in banking:. confusion and commerC'ml banking. Rutz. Feb. 1981. Phillips. Myron L. Jordan. An international survey {OECD. Staff Economics Studies 92 (Federal Reserve Eoard. part 2. White. Alton R. Spring. The effects of entry regulation on oligopolistic i~teraction: Tile Uruguayan banking sector.P° Bc~rke. J. Credit. 1977. Tschoegi. Ba_nk market structure and competition: A survey.~ 1973. Schuster. Profitability and market share of banks. Tschoegl. part 2.085. Journal of Money. Feb. n. and Banking. 1984. John. and John M.. 1977. and Arnold A. Market concentrafirOn and the d/fft~on of new t~_~. Mar. Leo. no. 1967.dwards. 1968. Rand Journal of Economics 15. no.A note. 1972. Hannah. DC) monthly. J o u ~ of Money. 1987.

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