ABSTRACT
This chapter provides an empirical synthesis on competition and efficiency over all thirty OECD countries during 1996-2006.1 This synthesis is based on two sets of data: a number of simple but commonly used proxies of competition and efficiency, and the model-based measures of competition and efficiency as estimated in previous chapters.2 Note that competition and efficiency, although describing different phenomena, are often seen as near synonyms, in the sense that heavy competition forces banks to improve efficiency. These measures are also linked to profitability (be it not unambiguously) in the sense that high competition tends to reduce profitability, whereas high efficiency may improve profitability. We investigate the qualities of the measures and their mutual relationships (or the relationships with competition and efficiency) by calculating mutual correlations.
Both in the literature and in daily practice, a number of simple measures or proxies of competition and efficiency are often used. Well-known examples are the ratio of operating (non-interest rate) expenses to gross income (or cost-income ratio; in short C/I), the net interest rate margin ratio (NIM) and indices of concentration, such as the Herfindahl-Hirschman Index (HHI) or market share of the top 3, 5 or 10 banks (C3, C5 and C10), based on a measure of banks’ size such as total assets, total loans or total deposits. Other market structure variables that are regularly used as measure of competition are average market share or number of banks. Alternative measures for the cost-income ratio we also consider are total cost to total income ratio (TC/TI) and cost margin (CM). Finally, more general bank performance variables, such as return on equity (ROE) and return on assets (ROA), are incidentally also used as proxy for competition and efficiency. Table 16.1 provides an overview of a number of our simple proxies and their precise definitions and Table 16.2 presents the average figures of these proxies for the thirty OECD countries.
