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Banking Industry Structure, Competition, and Performance: Does Universality Matter?

Fohlin, Caroline (2000) Banking Industry Structure, Competition, and Performance: Does Universality Matter? Social Science Working Paper, 1078. California Institute of Technology , Pasadena, CA. (Unpublished)

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By studying the German universal banking system in the pre-World War I period, in comparison with its American and British counterparts, this paper investigates whether universality (the combination of commercial and investment banking services) influences banking industry concentration, levels of market power, or financial performance of banks. The short answer is "no". First, given that the UK's specialized commercial banking sector was structured very similarly to the German universal industrial banking sector, and that neither system was extremely concentrated in the pre-war era, the paper argues that universality does not necessarily or uniquely propagate concentration. Second, on average, German universal banks behaved no less competitively than their American counterparts in the provision of loan services. Structural price markup models, as well as reduced-form Rosse-Panzar tests, demonstrate little deviation from competitive pricing in either country. The findings therefore indicate that universality does not lead to appreciable market power, in either an absolute or a relative sense. These same results also imply that banking industry concentration, at least up to the moderately high levels found in Germany, does not in itself produce anti-competitive behavior. The empirical results, though contradictory to common wisdom about German universal banking, are easily motivated by the theoretical literature in industrial organization. Finally, estimates of returns on equity and on assets suggest only slight international differences in average returns over extended periods, but large deviations in individual years. Adjusting for prevailing rates on government bonds, commercial loans, or commercial deposits narrows the gaps further. Universality is not linked with superior profitability, whether the hypothesized source is efficiency (economies of scope) or monopoly power. These three sets of findings may assuage fears that deregulation in American banking could lead to excessive concentration and therefore collusive behavior. At the same time, the results may lower hopes of significant efficiency gains from broadening the scope of services.

Item Type:Report or Paper (Working Paper)
Related URLs:
URLURL TypeDescription Paper
Fohlin, Caroline0000-0002-1380-2788
Additional Information:Thanks are due to Peter Bossaerts, John Latting, and Simon Wilkie for helpful discussions. I am grateful to Pei-Hua Hung, Jean Kim, Yong Kim, Jin Li, and Ernest Young for their energetic research assistance.
Group:Social Science Working Papers
Subject Keywords:Financial institutions, universal banking, financial system design, competition, concentration, banking industry structure, profitability, return on assets
Series Name:Social Science Working Paper
Issue or Number:1078
Record Number:CaltechAUTHORS:20170808-163959852
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79985
Deposited By: Jacquelyn Bussone
Deposited On:09 Aug 2017 16:47
Last Modified:03 Oct 2019 18:26

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