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Determinants of Bank-Market Structure: Efficiency and Political Economy Variables

Authors


  • I am grateful to Ana Isabel Fernández, Juan Fernández de Guevara, Ana Rosa Fonseca, Fernando Gascón, Víctor González, Ximo Maudós, seminar participants at Valencia University, an anonymous referee, and the editor for helpful comments and suggestions. Financial support provided by the Spanish Science and Technology Ministry (MCT), Project SEC2002–04765 is gratefully acknowledged. An earlier version of this paper has been published as the Working Paper No. 219/2005 of working paper series of the Fundación de las Cajas de Ahorro (FUNCAS).

Abstract

This paper analyzes how bank efficiency and political economy variables influence bank-market structure in 69 countries. Results for more than 2,500 banks over the 1996–2002 period indicate that the ability of the efficiency-structure hypothesis to explain bank-market structure varies across countries, depending on national political economy variables. Increased market monitoring and a better-quality contracting environment amplify the positive influence of bank efficiency on market share and market concentration. Stricter bank entry requirements and more generous deposit insurance schemes, however, mitigate the influence of bank efficiency on market share and market concentration.

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