The Italian banking industry: efficiency, market power, role in the local economies

Abstract

In the last twenty years the banking sector of many countries has undergone a period of consolidation and restructuring. This has raised concerns about the welfare implications of larger credit institutions, given that the banking industry is vital for the whole economic system. From a theoretical point of view, one should expect two "direct" effects from these structural transformations. First of all, consolidation may allow banks to achieve a higher level of efficiency thanks to the exploitation of scale and scope economies. Secondly, mergers and acquisitions among credit institutions could lead to an increase in local market concentration and thus, as maintained by the Structure-Conduct Performance (SCP) paradigm, to an increase in banks' market power. In turn, market power in banking is the channel through which the consolidation process could have some "indirect effects" on other economic phenomena. Indeed, as shown by recent empirical works, the degree of competition in banking markets is a key explanatory variable of banks' X-efficiency, as well as credit availability for small firms, relationship banking, economic growth and financial stability. In this dissertation we empirically explore some of the consequences of the consolidation process, focusing on the italian banking industry. More precisely, Chapter One studies the effect on banks' cost efficiency. Starting from a Multi-output Symmetric Generalized McFadden cost function, we estimate a system of factor demand equations in order to assess the degree of scale and scope economies of Italian banks in the period 1992-2007. We find evidence of slight economies of scale and significant economies of scope. Our main conclusion is that the efficiency gains coming from merger and acquisition operations could be an explanation of the consolidation process; at the same time, they could translate into beneficial effects for consumers and firms, provided that they are not offset by an increased market power… [a cura dell’Autore]