Eu Banking Market Structure, The Degree Of Competition And Efficiency

In the process of the EU integration, European financial market was under great transformation and so did banking industry. The segmented financial markets have been integrated to a pan-European one, in which banks competed fiercely across countries, and M&A activities led to less banking institutions and larger concentration. On one hand, according to the traditional industrial theory, it would probably do harm to competition and efficiency; On the other hand, Efficient-Structure Hypothesis proposed by Chicago school implies that survival pressure forced banks to improve their efficiency, and boosted M&A activities. The two-way effects exist side by side and hence cause two contradictory explanations about the relationship between concentration, competition and banking efficiency. Besides, New Empirical Industrial Organization method (NEIO) introduced H-statistics to describe competition degree, based on the theory of Contestable Market. All these industrial organization theories and methodologies explained the relationship between concentration, competition and efficiencyIn order to reveal the relationship between the three variables during the integration process of EU banking industry, the paper, based on the bank-level financial statement data, measures the competition degree of EU banking industry by both structural indexes (concentration ratio and HHI) and non-structural indexes ( H-statistics), the efficiency by DEA method, and inspects the relationship between the concentration, competition and efficiency of EU banking industry using econometric methodologies of correlation analysis and linear regression.The empirical analysis result distinctly supports neither traditional industrial theory nor Efficient-Structure Hypothesis proposed by Chicago school. Instead, it suggests that the non-structural indexes introduced by NEIO can decently measure the competition degree of EU banking industry, and meanwhile is positively correlated with banking efficiency. The results of correlation analysis and linear regression implies that, among several explanatory variables that may influence the DEA efficiency of EU banking industry, H-statistics can partly explain the distinction of efficiency during different time period. The fiercer the competition is, the more efficient the industry is. This result, on one hand, supports the understanding of NEIO on competition degree (namely the market structure can not comprehensively reflect competition degree, and other non-structural factors, such as market contestability, may affect competition degree), and on the other hand, it reveals that stimulating competition in banking industry helps improve efficiency. However, stimulating competition does not only refer to reducing concentration ratio by regulation, but also includes increasing the market contestability of banking industry (market access and deregulation on business scope, foreign banking shareholding and scale) by proper deregulation and registration.