ENSAYO CLÍNICO, CONTROLADO Y ALEATORIZADO, SOBRE LA EFICACIA INCREMENTAL

The banking sector is of central strategic importance for economic growth, capital allocation, financial stability, and the competitiveness and development of the manufacturing and service sectors. In Europe in 2000, bank assets were valued at the equivalent of 206 per cent of Europe-wide GDP.

The nature of competition in European banking has changed significantly since 1990. Follow-ing deregulation (via the Second BankFollow-ing Directive), the creation of the EU sFollow-ingle market in financial services, and the launch of the euro, barriers to trade in financial services have been significantly reduced. Banks are able to trade not only in their own countries, but also else-where throughout Europe. Banks have increased the range of products and services they offer to customers, leading to the distinction between banks, building societies, insurance companies and other financial institutions becoming blurred. The arrival of foreign-owned banks in many European banking markets has caused competition to intensify. Furthermore, a wide range of non-bank institutions, including supermarkets and telecommunications firms, now offer financial products and services as well. This has placed additional pressure on established banks to lower costs, limit their risk exposures, improve their management and governance structures, and find new ways of generating revenues from new forms of banking business.

Structure

During the period 1990 –2002, there was a decline in the number of banks trading in most European countries. This trend is similar for mutual savings banks, cooperative banks and com-mercial banks. Table 1 shows data on the total number of banks (domestic and foreign-owned) trading in selected European countries in 1990, 1995, 1998 and 2002. In most (but not in all) countries, there has been a pronounced decline in bank numbers. Over the same period, branch numbers have also declined, as banks have sought to rationalize their branch networks.

This is part of an overall trend towards consolidation in the financial services sector, which has been accompanied by an increase in seller concentration. In 2002, seller concentration measured by the five-firm concentration ratio (the share of the five largest banks in the total assets of the banking sector as a whole) exceeded 60 per cent in Belgium, Denmark, Greece, Netherlands, Portugal, Finland and Sweden. Concentration has also increased, but has remained at lower levels, in Italy, Germany and the UK (where the 2002 five-firm concentration ratios were 31 per cent, 20 per cent and 30 per cent respectively).

However, the number of foreign-owned banks trading in every country included in Table 1 increased over the period 1990 –2002. In the UK in 1998, there were 254 foreign banks with a 57 per cent share of total banking sector assets. In Belgium, there were eight foreign banks with a 48 per cent share; in France there were 280 foreign banks with a 15 per cent share; and in Portugal there were 16 banks with a 35 per cent share. In other European countries (except Luxembourg), foreign banks accounted for less than 10 per cent of total banking sector assets.

Case study 1.1

12 Chapter 1 n Industrial organization: an introduction

Conduct

In response to competitive pressure (brought about by the entry of foreign banks and new financial services providers), many established banks have consolidated by means of merger and acquisition. This strategy has enabled some banks to achieve the large size (or critical mass) required to operate effectively throughout the European single market. Significant recent mergers in the UK include the Royal Bank of Scotland’s acquisition of NatWest in 2000, and the merger between the Bank of Scotland and the Halifax in 2001. Cross-border mergers include the Dutch bank ING’s acquisition of the Belgium Banque Bruxelles Lambert in 1999, and the acquisition of the UK’s Abbey by Spain’s Banco Santander in 2004. In 1999, 11 of the 20 largest banks in Europe had achieved top 20 status as a result of large-scale merger deals (Pescetto, 2003).

Many banks have also implemented strategies of diversification and financial innovation.

Banks now offer their customers telephone and internet banking services, online share dealing, letters of credit, pensions and insurance, and a wide range of investment services. This has resulted in an increased reliance on revenues from non-traditional banking activities. Non-interest bearing income as a proportion of the total income of European banks increased from 28.3 per cent in 1992 to 42.5 per cent in 2001 (European Commission, 2004).

Performance

Table 2 shows that the average profitability (measured by return on equity) of banks in most European countries improved between 1990 and 2002. Given that competition has become more intense, it seems likely that increased profitability is a consequence of revenues having Table 1 Number of banks by country (selected countries, 1990 –2002)

Country 1990 1995 1998 2002

Austria 1,210 1,041 898 823

Belgium 157 145 123 111

Denmark 124 122 212 178

Finland 529 381 348 369

France 2,027 1,469 1,226 989

Germany 4,720 3,785 3,238 2,363

Italy 1,156 970 934 821

Luxembourg 177 220 212 184

Netherlands 111 102 634 539

Portugal 260 233 227 202

Spain 696 506 402 359

Sweden 704 249 148 216

UK 624 564 521 451

EU Total 12,582 9,896 9,260 7,751

Source: Central Bank reports, European Central Bank (various).

being restricted, and prices being raised. This stifling of competition is likely have damaging implications for consumer welfare. This suggests there is a role for govern-ment or regulatory intervention to promote competition and prevent abuses of market power.

n Competition might be promoted by preventing a horizontal merger involving two large firms from taking place, or by requiring the break-up of a large incumbent producer into two or more smaller firms. Such measures operate directly on market or industry structure.

n Intervention might instead be targeted directly at influencing conduct. A regulator might impose price controls, preventing a firm with market power from setting a profit-maximizing monopoly price. Legal restrictions on permissible forms of

1.3 The structure–conduct–performance paradigm 13

been generated from a wider variety of sources (diversification), and of the more efficient use of technology (such as consumer databases and call centres). This means banks are able to offer a wider variety of products at lower cost than was previously the case. Some of the increase in profitability has been driven by aggressive cost-cutting strategies, including branch closures and manpower reductions.

Overall, the level of competition, both between banks and other banks, and between banks and other financial sector institutions, continues to intensify. Deregulation and technological progress have lowered entry barriers and made banking more competitive. However, con-tinued consolidation has resulted in a larger proportion of the banking sector’s assets becom-ing concentrated in the hands of a relatively small number of institutions.

Table 2 Return on equity, 1990 –2001 (various European countries, %)

Country 1990 1995 1998 2001

Austria 8.63 8.15 9.48 11.29

Belgium 8.29 12.89 14.76 15.31

Denmark −3.34 18.5 14.60 16.53

Finland 5.61 −7.93 9.86 n.a

France 10.15 3.63 9.93 11.76

Germany 11.93 12.57 17.38 5.12

Italy 16.40 5.91 13.17 14.01

Luxembourg 6.17 19.95 24.67 18.50

Netherlands 12.30 15.81 14.30 15.23

Portugal 12.54 7.65 7.56 6.31

Spain 13.58 9.17 11.07 9.26

Sweden 3.65 22.08 17.33 19.48

UK 14.45 28.59 28.31 20.05

EU Average – 10.56 15.24 12.33

Source: Various Central Bank reports and OECD (2003) OECD Bank profitability statistics.

Paris: OECD.

collusion might be strengthened, or punishments for unlawful collusion might be increased.

n Finally, a wide range of government policy measures (fiscal policy, employment policy, environmental policy, macroeconomic policy, and so on) may have implica-tions for firms’ performance, measured using indicators such as profitability, growth, productive or allocative efficiency.

In common with the Austrian school, the Chicago school argue vehemently against government intervention in markets in order to promote competition (Reder, 1982).

The Chicago school are a group of prominent academic lawyers and economists, whose pro-market, pro-competition and anti-government views were perhaps at their most influential during the 1970s and 1980s. The Chicago school are identified with the argument that large firms are likely to have become large as a result of having operated efficiently, and therefore more profitably, than their smaller counterparts.

Therefore punishing the largest firms because they are also the most profitable firms is tantamount to punishing success. Even if certain abuses of market power do take place in the short run, these are likely to be self-correcting in the long run, when com-petition will tend to reassert itself. For example, there is little point in passing laws against collusive agreements, since such agreements are inherently unstable and are liable to break down in the fullness of time (Posner, 1979). Markets and industries have a natural tendency to revert towards competition under their own steam, without the need for any intervention or assistance from government.

The strident views of the Chicago school have not gone unchallenged. Blaug (2001), for example, accuses the Chicago school of promoting ideology rather than science.

The Chicago school does not deny that there is a case for antitrust law but they doubt that it is a strong case because most markets, even in the presence of high concentration ratios, are ‘contestable’. How do we know? We know because of the good-approximation assumption: the economy is never far away from its perfectly competitive equilibrium growth path! Believe it or not, that is all there is to the ‘antitrust revolution’ of the Chicago school.

(Blaug, 2001, p. 47)