Panel Granger Causality between Bank Efficiency and Market Concentration in the European Union

Abstract

This paper seeks to contribute to the literature with the test of the panel Granger causality relationship running not only from bank efficiency to bank market concentration, but also the reverse causality from concentration to efficiency. For the measurement of bank efficiency, we adopt Data Envelopment Analysis (DEA) and for the bank market concentration we use the Herfindahl-Hirschman Index (HHI). The findings confirm the relative complexity of this relationship, but they are generally in line with the structure conduct performance (SCP) paradigm and the suggestions that the increase of the banks’ market power will contribute to inefficiency. Within a panel of 27 EU countries over a relatively long time period, from 1996 to the onset of the 2008 financial crisis, there is evidence that the most cost-efficient commercial and savings banks operated in less concentrated markets.