The Banks’ profitability – concentration relationship in an era of financial integration

Abstract

This paper investigates the impact of concentration ratio of the Greek commercial banking market on banks’ return on equity; that is, it examines the structure – conduct – performance (SCP) hypothesis. This examination is performed by estimating a relationship that combines time series and cross-sectional data over the period 1993-1997. To accomplish this task we use panel data procedure and consider the total model, the fixed effect model and the random effect model. The leverage multiplier, the asset utilization, an expense ratio and a productivity ratio are employed as a vector of control variables that may differ across banks, or time periods. The empirical results indicate that the financial variables are important determinants of banks’ profitability. However, their impact appears to differ across banks. This finding reveals the different importance that the banks place to financial factors. Moreover, market structure is found to have no influence on banks’ performance, which suggests that the existing competition among Greek banks is not bounded by the market structure.