Friday, January 25, 2013

A Frontier Measure of U.S. Banking Competition

Posted by D. Daniel Sokol

Wilko Bolt, De Nederlandsche Bank, and David Humphrey, Florida State University offer A Frontier Measure of U.S. Banking Competition.

ABSTRACT: The three main measures of competition (HHI, Lerner Index, and H-Statistic) are uncorrelated for U.S. banks. We investigate why this occurs, propose a frontier measure of competition, and apply it to five major bank service lines using data only available since 2008. Fee-based banking services comprise 35% of bank revenues so assessing competition by service line is preferred to using a single measure for traditional activities extended to the entire bank. Academic-based competition measures explain only 1% of HHI variation. HHI merger/acquisition guidelines could be raised since current banking concentration seems unrelated to competition.

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