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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)

66 P. the loan/deposit ratio (in practice. Schuster (1984)'1.Australia. Examples are funds source management and funds use management I'Haslam (1968)'1. c_oncentration [Rhoades (1977). loan loss expenses and some overhead expenditures [:Short (1979). 2. Tschoegl (!982)]. Finally in their exposition of the Galbraith-Caves hypothesis. Edwards (1977). External to the bank. Bourke. Determ|uants of bank profitability The literature divides the determinants of bank profitability into factors internal ar. 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. Other variables for which data are available and which are suggested in the literature are capital and liquidity ratios. Hanweck and Humphrey (1982). Bell and Murphy (1969). 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 . typically American. Holland. Norway and Spain. This is largely a matter of convenience as Spanish banks conduct a large part of their business through the acceptance mechanism. Contrary to common practice. 3. Short (1979)1 competition [-Phillips (1964). total assets are defined to include acceptances on both sides of the balance sheet.regulation [Jordan (1972). Denmark. ranked by total assets. interest rates as a proxy for capital scarcity [Short (1979)1 and government ownership !'Short (1979)]. 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. England and Wales. 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 . my approach and the conventional approach are both subject to disadvantages. bank size and economies of scale ['Benston. In so far as possible data were standardised to remove differences in local accounting practices particularly in relation to the treatment of reserves. circumstances but which may not be obtained in an international survey. Canada.d external to the bank. Bank profitability other ways is also examined. Massachusetts. growth in market [Short (1979)]. Tucillo (1973)]. California. several factors have been suggested as impacting on profitability . the reciprocal of the liquidity ratio). Many of the internal determinants reviewed in the literature rely for their estimation on data which are available in limited local. New York. Ireland. Kwast and Rose (1982)].

entry barriers. daunting as regulation is not readily susceptible of comparative measurement. 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 .etic~n on banks and regulatory protection and profitability. there is an implied assumption that within the U. for instance. interest rate restrictions. a matrix or tabulation of various regulatory interventions will assist us little in the attempt to measure the differential effects of regulation across countries.1. The issues of regulation. It has also been suggested that differences in the capital ratio could be . The empirical problems of doing so are. it proved impossible to do this in a time series study extending over ten years. They suggest that a lower level of service as measured in a variety of ways is detectable.S. However. 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. Bourke. the direction of any of these individual effects is unclear. varies from country to country. however. et cetera.nd regulatory prntp. ! 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. must be reviewed in some detail becaue of the differing emphases that U. credit ceilings. Bank profitability 67 than by being reflected in higher profits. the literature has never adequately examined the consequences of changes in the intensity 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. domestic studies must have. 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. however. Design of the model Testing of most of the variables described above as being represented in the literature does not present major difficulties.S. the intensit/ of regulation is a constant. Accordingly. 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 ~. Regulation In relation to regulation. as compared to international studies. there may be a prcsump~lt. 4. n that regulation out~.P. Some aspects of the literature. 4.S.~de the U.

p. 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. 685) questions the conceptual appropriateness of the use of book value as a proxy for replacement cost but.gnitude and state. Secondly. in any case. Bourke. 670) suggests the use of Q ratios in examining changes in cost of capital for banks in different countries. this requires tMt market-derived cost of capital figures be first obtained and excess costs of capital be computed for banks in each country. ~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~. that the super-normal earnings of firms in a regulated industry may be appropriated in the form of payroll expenditure. many of the banks included in this survey are not publicly traded.) Goodman (1984.the 'differential efficiency' hypotheses.68 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. re of the banks in this sample. p. However. usually because they are state owned. Rhoades (1977) provides an extensive review of empirical work in this area. There is also the possibility. 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 . Firstly. 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. wl~en . more recent work casts doubts on the validity of these findings and in particular. 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. Gilbert (1984). However. Aliber (1984. suggests that earlier studies were unable to take advantage of the implications of the subsequent development of contestable market theory [Baumol. (Q ratios relate the market value of the firm to its bock value. 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. relevant particularly in countries where the banking industry is unionised. in a critical review of the literature. 4.2. and no market capitalisation figures exist. Panzar and Willig (1982)] with its emphasis on entry restrictions.

however. Nebraska.nit costs for industrial firms. 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.S. An interesting study by Hannah and McDowell (1984) relates the rate of diffusion of automatic teller machines (ATMs) to several independent variables including concentration. They also found no significant relationship between concentration and market share in these markets. Oklahoma and Wyoming) and the extension of his approach to branching states (and obviously countries) may not be appropriate.7) also found a significant negative correlation between changes in concentration aad . 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. 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. New Mexico. however Chappell and Cottle's use of the price-cost margin approximates to my 'value-added' variables (see below). 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. An industrial study by Peltzman (i97.regulatory in limited branching states but commercial and regulatory in other states. Unfortunately the data required to support a similar study in the international banking sector is not available. 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. It is likely. Bourke. Missouri. Having controlled ior factors such as wage costs. 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. . Kansas. In his conclusion Peltzman notes that his findings are 'consistent with an eclectic view but one in which efficiency effects predominate'.P. ! believe that this caveat may be related to differences in the nature of barriers to e n t r y . His research is confined to limited branching states (Colorado. they found that the rate of diffusion was positively related to concentration. banking markets. In any case the absence of market share data for banks not included in my study makes Smirlock's approach unfeasible at this time. 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. SmirlocK raises an important ca'~eat about his work.

particularly in relation to foreign banks. paradoxically these barriers when they exist may well be more apparent than real. fringe entrants may shelter.2-:. while many countries in this survey maintained formal entry barriers.b~. Additionally. thrifts in the.: potential profits latent in their position of market power in the f o ~ of . What is the extent of regulatory barriers to entry? Does the existence of concentration in itself constitute an effective barrier. 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. as noted above. Ball and Tschoegl (1982. et cetera.. For instance. Ireland and Australia. He suggests that regulatory constraints are only one of many factors. Bourke.in some ins~. Their approach to market definition is similar to that adopted in my work.70 P.] 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. submits that market leaders in concentrated industries take a significant portion of th. International evidence in the literature is also scant in relation to the question of whether concentrated m~rkets themselves constitute a barrier to entry. the present state of the literature offers little clearcut guidance in relation tt~ the role of concentration in bank profitability determination .~ ~ocleties in Britain. United States.. 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. In summary. almost all countries had ~xperienced a growth of potential competitors to traditionally organised banks . p. but offer no empirical evidence. Trustee Savings Banks in i'. 4. particularly in retail markets? Looking firstly at the question of the existence of regulatory barriers. 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.nces data unavailability makes the testing of some promising concepts impossible for international markets.3. Risk avoidance The Edwards-Heggestad (1973) and Heggestad-Mingo (1976) variant of the Galbraith-Caves hypothesis EGaibraith (1967)1.. Bank profitability Two questions arise. [See Tschoegl (1987) for a comprehensive discussion of the factors affecting foreign direct investment in retail banking.'ew Zealand. 417) suggest that concentrated markets may offer a price umbrella under which new.

Additionally. In banking terms.4.. Bourke. it is not proposed to test for economies of scale.-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. In the case of banking this avoidance of uncertainty largely takes the form of a reduced tisk profile on its loan book. Secondly. Accordingly. 4. 4. I believe that the foi~wing two measures of value added used are a reasonable proxy. Bank profitability 71 avoiding uncertainty. In the light of international data problems.P.'~ne series cross-section. value added would be strictly defined as loan interest and other revenue less deposit interest and other non-wage expenses. Summary of data and independent variables The data is a pooled t.5. 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. net income before tax + staff expenses is used to test the expense preference theory on the basi. Tschoegl (1983) a13o confirms this result for the 100 largest banks in the world from 1969 to 1977.6. comment may be made on the possible operation of the Edwards-Heggestad-Mingo effect. value added is usually *aken to mean the difference between selling price and all bought-in inputs excluding labour. 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.s that this measure of value added largely removes the possibility of eith. 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. I suggest the concept of 'value added' as part of the solution process.. by observing the relationships between net income before tax +staff expenses +loan losses and concentration. As a step towards dealing with this general problem. Two variants on this approach are used.S. Short (1979) tested for this variable but obtained no significant results. banks) do not experience economies of scale [Benston. Where parent banks and . In industrial terms. 4. Hanweck and Humphrey (1982)]. Firstly. Economies of scale The literature is reasonably clear that larger banks (across a broad range of magnitudes for domestic U.

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

Net income before tax as a ratio of total assets. the conclusion that the appropriate functional form for testing is a linear function although there are dissenting opinions. However.P. Bank l~rojJtGbility 73 capital scarcity although it may have been more appropriate to use real interest rates. the annual growth in the consumer price index in each country is used as an independent variable.8. 4.Inflation. It is suggested that growth in total market may be considered as a potential variable in the sense that an expanding market. annual growth in money supply in each country is suggested as an independent variable. as opposed to profit. Accordingly.he had used it to control for banks' managements who were growth. Dependent variables The following general categories of dependent variables were used. comes to. Net income before and after tax as a ratio of total capital including all reserves. should produce the capability of earning increased profits. . (b) Return on assets. Short (1979) investigated this question and concluded that 'linear functions produced as good results as . The ratio of after-tax profits to capital was used by Short (1979). - 4. (a) Return on capital.7. Market growth. in so far as it is discussed. Bourke. (0 The ratio of net income before taxes+staff expenses to total assets. 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. (c) Value added return on total assets. maximisers. (i0The ratio of net income before taxes+staff expenses + loan losses to total assets. which is not unusual and. 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. Functionalform of the eguation The literature generally. Short found that asset growth in individual banks was not significant . particularly if associated with entry barriers. accordingly. Its effect depends on the assumption that wages and other non-interest costs are growing faster than the rate of inflation. 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). The use of market growth as a variable is not suggested extensively in the literature.

it is proposed to test using a linear function of the form: y = c + a t x t +azx2 +aaxa. Cho and Krishnan (1986). Variable names The variable names are as follows: 4. are the independent variables as described above. Dependent variables (NPBT = Net profit before tax. [For an interesting discussion of some related econometric issues in a study of international iocation decisions of U..9.2. BTSEPLTA : NPAT + staff expenses + provision for loan losses as % of total assets. o BTTA NPBT as % of total assets.9. banks. CRTA CBINVTA : Capital and reserves as % of total assets. 4. NPAT = Net profit after tax). Accordingly. NPBT + staff expenses as % of total assets. Bank profitability any other functional form'. there is no evidence of any intertemporal error correlation structure nor of any significant difference in the intercept terms by year or by country. zero .. :Cash and bank deposits+investment securities as % of total assets. . Godfrey.1. and x~ to x.otherwise. BTCR NPBT as % of capital and reserves. MON :Growth in money supply for each country for each year (IMF). CONC : Three bank concentration ratio. Bourke. BTCRTB : NPBT as/o/ o f c:pital and reserves + total borrowings. INT : The long-t¢.] 4. MacKinnon (1985) specification test was also applied with results that supported the use of the linear function. 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. 1 when a bank is owned by a government.anxn.. where y is the dependent variable. c is the constant term. Independent variables GO VT : A dummy variable :epresenting government ownership. The Davidson. see Nigh.S.9.. In addition.'m bond rate for each country for each year (IMF). ATCR NPAT as % of capital and reserves.74 P. national or provincial. BTSETA .

71 b 0. Bank profitabilif y Table 1 Estimates of the relation between return on capital a n d selected independent variables.03 INT 0.O3CONC'+O. Bourke. Constants omitted.003 BTCR BTCR BTCR ATCR BTCRTB BTCRTB =-0.36GOVT~+O.04-2.03 =-0.1 =-0~09 =-0.07 MON 0.3 b 0.1 0.6 " N u m b e r of observations for each equation: 116.~cai.1 0.17 b 0. However.1 0.t statistics omitted for reasons of space.15 b 0.6INT" R 2 =0.27 "--0. Table 1 replicates Short's work to a greater or lesser extent depending on the particular equation examined• However. eq. 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. 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. eqs." 75 GOVT (I) (2) (3) (4) (5) (6) CONC 0. . Resuhs Findings are reported in tables 1 and 2. 1976 and 1973 with results in line with those of the time series with equally poor explanatory power. the following comments may contribute to an understanding of the differences. t regression result: than in mine.04 0. However.6 =-0.06 0.05 n 0.25 b - R2(adj) 0. (!)--(5) were reestimated on a year by year basis for years 1981. In addition to the inherent data collection problems of the present work which have been described.01 0. 1979. Additionally.3 b 0. bSignificant at 5% level . (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. CPI SE • Percentage increase in consumer price index for each country for each year (IMF). • Staff expenses as % of total assets• 5.1 0.P.52.04 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~.

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

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

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

and Banking. 1982. Galbraith. and John M. no. Concentration among international banks . Kwast. 3. 1968. no. and John J. The Galbraith--Cav~ hypothesis and managerial motives in ~ ~ y Journal of Economics LXXXVII. Credit. Laurie S. Journal of Banking and Finance 6. A reexamination and extension of the relationship between concentration and firm rap2 stability. The relation between commercial bank profit rates and banking concentration in Canada. Journal of Law and Economics XX. The new industrial state (Houghton M i e n . The role of location-related ~ r s in U.S. Hannah.al of Banking and Finance 6. Market concentrafirOn and the d/fft~on of new t~_~. 1976. MacKinnon. 2. and Roger D. Mar.ercial banks.. and Banking 16. Journal of Business 56.dwards.. Staff Economics Studies 92 (Federal Reserve Eoard. Ba_nk market structure and competition: A survey. The gains and loss~_ from indust_rial concentration..R. Rand Journal of Economics 15. no. Nov. Adrian E. Jou. Hasla~ John A. Short. Rhoades.A s L ~ p ~ v ~ o n of the differencing test. no.A note. Edwards. Halbert. Tschoegl. Reveli. 1980. 1985. 4.085. S. DC}. 2. Summer. Journal of Political Economy. Costs and margins in banking:. and Edgardo Favaro. Size. growth and transnationality among the world's largest banks. Kang Rae Cho and Suresh Krishnan" 1986. 1984. operating efficiency and profitability among large comw. Journal of Money.. P~b!~ T. The effects of entry regulation on oligopolistic i~teraction: Tile Uruguayan banking sector. no. An international survey {OECD. lnternafion~ Economic Review 26. Peltzman.S. 1987. Western Europe and Japan.. Frank~ R. Srairlock. 1980. Rose. Mimeo. Producer protection. and Banking 16. Nov. John. Profitability and market share of banks. 3. Bell Journal of Economics. A heteroskedasticity consistent covariance matrix estimator and a direct test for heteroskedasticity. 1972.aology in the banking industry. no. Willi~an A. Journal of Money.. n. Alton R. J. Jack. and John T.. confusion and commerC'ml banking. Fall. Hegges'ml. 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. part 2.. A statistical analysis of the relative profitabi~ty of comrr~'rcial banks. Washington. market size and performance: Some evidence from outside the United States. International retail banking as a strategy: An assessment. Comment on international banking: A sur'¢ey. Stephen A. Uncertainty. Prior. J. Mingo. no. 1984. Journal of Bank Research. International Monetary Fund. Goodman. 1983. no. Aug. Journal of Finance. Pads). Spl~!er. 1982. 4. DC) monthly.. 1967. Journal of Finance 23. International ~ statistics {IMF. Pricing. Revell. 1979. Brock.. no. Intlation and financial institutions (Financial Times. The Review of Economics and Statistics 66. Boston" MA~. 1984. banking involvement abroad: An empirical examination. 1. The Review of Economics and ~. no.. Myron L. Aimarin" 1964. Statistics 63. Rhoades.P° Bc~rke. ~ ~. 1. 4. 4.-aal of International Business Studies. Bank concentration. Spring. F. Journal of Banking and Finance 3. Leo. Douglas. Washington. and Baaking 17. Tucillo. Journal of International Business Studies. Schuster. J o u ~ of Money. Brock K. London). Competition. 1977. marke~ ~ e and perfo~ance:. Jordan. McDowefl. Structure and performance studies in banking: A summary and evaluation. Credit. Summer.d. .. Mar. prior market s~a'ucture and the effec~ ul-~" government ~gulafion" Journal of Law and Economics 15.LeslieGo~rey and J~es G. Gilbert.~tab~ity Davidson. Stephen A. Michael. White. 1981. Adrian E. no.. 1977. $ourn~ of M ~ . Econometrica 48. Credit. Tschoegi. 1984. Taxation by regulation: The case of financial intermediaries. Oct. Russell. and Arnold A. Tschoegl. Feb. 2. Phillips.~ 1973. 1979. 1973. 1984. 3. (IMF. ~ . Feb. Franklin R~ |977. Arnold A. Evidence on the (non) relationship between concentration and profitability in banking. Feb. nonprices and concentration in comwnercial banking. Nigh. Heggestad. Credit. Adrian E.. Rutz. 1977. Short. Timothy H.K. Jov~. Was "l~ngton" DC). part 2.