The impact of banking market structure on Bank's profitability: Evidence from the OECD Economic Countries.

Abstract

Does market structure affect bank’s performance? To answer this question, I examine 7,035 commercial, saving and co-operative banks from 35 member countries of OECD organization during the year 2002 until 2015. I employ a panel analysis with cross-sectional regressions to estimate the impact of market structure, for instance HHI, CR5 and Lerner index on Bank’s profitability, for instance ROA. Accounting for both observed (control variables) and unobserved (fixed effects) heterogeneity, I find evidence for nonlinearities in the market structure. More precisely, concentration up to a specific threshold reduces the profitability and above that threshold increases the profitability. In addition, I investigate interaction terms between market structure and bank’s characteristics that can enhance or mitigate bank’s profitability.