Efficiency, market structure, and performance relationship for the global banking industry: A comparative analysis among different regimes

Efficiency and performance become critically important in an integrated banking industry. Banks with different structures and regulatory environments, such as functionally integrated and separated banking system, would exhibit different levels of inefficiencies, systematic X-inefficiency and scale inefficiency. A theory of relative market power hypothesis implies a potential beneficial role for antitrust enforcement, while a theory of efficient structure hypothesis suggests that such enforcement may be socially costly. Under a competitive environment, inefficient firms are forced to leave the market because they cannot maintain prices or profits high enough to cover costs or expenses. On the other hand, under the monopolistic conditions, high-cost firms are to a certain extent immune from the forces of competition which allows them to operate in an inefficient manner and yet still survive. As such, monopolistic industry is more compatible with the policy objective of maintaining a failure-proof banking system, while competition is more consistent with the goal of efficiency.; This dissertation employs a three-step approach to examine the aforementioned issues using 1986-1994 annual data for 133 banks, which are relatively large commercial banks in ten countries over the nine year period. In the first step, we used a stochastic cost frontier methodology to estimate both X-inefficiency and scale inefficiency scores for individual banks. These inefficiency scores were utilized in a second-step regression model to examine correlation between firm specific inefficiency and organizational form. In the final step, this study tested the structure-performance hypotheses which incorporate two estimates of inefficiencies directly into the test.; This study finds that (1) the banks within the universal banking system countries are: operating more efficiently than do the banks within the separated banking system countries. Efficient banks come from wide range of business activities; (2) the major source of the inefficiencies are from deficiency of outputs rather than excessive input usage, particularly for the banks in the separated baking system countries; and (3) more efficient banks gain higher market shares and earn greater profitability which are consistent with the theory of efficient structure hypothesis. Therefore, the antitrust enforcement is not warranted and is socially costly.