Market Power & Efficiency in Banking
Submitting InstitutionBangor University
Unit of AssessmentBusiness and Management Studies
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Economic Theory, Applied Economics
Summary of the impact
At Bangor there is an extensive tradition of empirical research
addressing the long standing public-policy concern of balancing banking
sector market power with regulation. The impact of Professor Molyneux's
research during 2008-2013 has been to inform policy formulation
surrounding the debate about bank monopoly behaviour and its links to
industry efficiency. In particular, his empirical analysis has focused on
the use of non-structural (price-cost or/and price-revenue relationships)
and structural (concentration ratio) measures of competition (and their
links to cost and profit efficiency and various risks). Evidence of the
impact and scope of this research is found in the extensive use of these
measures in publications by, and policy debate within, a variety of
financial organizations at the national, European and international level.
Empirical research involving public policy issues in banking at Bangor
University date back to the seminal contributions of Jack Revell in the
1980s and by the group led by Edward P. M. Gardener in the 1990s.
Professor Molyneux, has contributed to this collaborative research effort
since joining Bangor in 1986 and he took over its leadership in 2008. The
impact of his work on the formulation of "policy analysis of banking
sector competition and efficiency" [b1] rests on the design and
dissemination of alternative measures of market power and linking these to
efficiency and risk in banking.
The underpinning research focuses on methodological advances relating to
modelling the competitive characteristics of banking markets using
non-structural (price-cost or/and price-revenue relationships) [a1, a3,
a4 and a5] and structural (concentration ratio) indicators [a1,
a4 and a6]. Methodological advances also sought to model
bank efficiency using a variety of approaches [a2 and a6]
and link the indicators of bank efficiency and risk to the market power
measures [a5 and a6]. An important contribution of this work
is to identify three critical dimensions of bank behaviour — competition,
efficiency and risk-management — that cannot be viewed in isolation and
(for accuracy and policy relevance) must be considered as related and
References to the research
(Bold denotes currently member of academic staff at Bangor)
[a1] Lloyd-Williams, M., Molyneux, P., and Thornton,
J. S. (1994) 'Competitive conditions in European banking' Journal
of Banking and Finance, 18: 445-460 (submitted to RAE 2001). DOI
[a2] Altunbas, Y., Evans, L., and Molyneux, P.,
(2001), 'Bank ownership and efficiency', Journal of Money, Credit and
Banking, 33: 926-954 (submitted to RAE 2008). Available at:
[a3] Goddard, J., Molyneux, P., and Wilson, J.O.S.,
(2004), `Dynamics of growth and profitability in banking', Journal of
Money, Credit and Banking 36, 1069-1090. (Google Scholar
Citations in October 2013: 210). Available at: http://www.jstor.org/stable/3839101
[a4] Carbó, S., Humphrey, D, Maudos, J and Molyneux, P.
(2009) `Cross-country comparisons of competition and pricing power in
European banking', Journal of International Money and Finance, 28,
115-134. (Google Scholar Citations in October 2013: 149). DOI:
[a5] Liu, H., Molyneux, P., and Wilson, J.O.S (2013)
'Competition and stability in European banking: A regional analysis' Manchester
School, 81, 176-201. DOI: 10.1111/j.1467-9957.2011.02285.x
[a6] Fiordelisi, F., Marques-Ibanez, D. and Molyneux, P.
(2010) `Efficiency and risk in European banking', European Central
Bank Working Paper, No 1211, June 2010 and appeared in Journal
of Banking and Finance, 2011, 35: 1315-1326. DOI:
Evidence of research quality:
Molyneux's work on competition, efficiency and risk is heavily cited with
[a2] listed as the most cited paper in Google Scholar searches for
`ownership and efficiency' (426 citations). Other areas that appear at the
top in Google Scholar searches include those on `competitive conditions in
banking' (345 citations); `efficiency in European banking' (337 citations)
and 303 citations for a Wiley textbook on Efficiency in European Banking;
`efficiency and risk in banking' (316 citations); and 88 citations for [a6].
Details of the impact
To maximise impact, from the outset critical elements of this research
were developed in conjunction with policymakers and practitioners.
Molyneux and his team were involved in the design and production of a
variety of studies, including projects, consultancies and advisory work
that helped advance policymakers' insights in the aforementioned areas.
Examples of these interactions include projects for the World Bank on the
integration of financial services (1997-1998), a study for the European
Commission on examining the competitive impact of the Single Market
Programme in Financial Services (between 2002 and 2004) and, more
recently, the analysis of bank competition, consolidation and efficiency
for the European Commission (2002-2004), the European Central Bank (2002
and 2008), and the Italian Banking Association (2009-2011), as well as
on-going research with FUNCAS (Spanish Savings Banks Foundation).
Pathways to impact:
Molyneux's research team aims to influence and inform policy formulation
surrounding the debate about bank monopoly behaviour through
methodological approaches that model competition, efficiency and risk. Its
pathways to impact since 2008 are the following routes (as exemplified
under "selected users and beneficiaries" below):
- Highly cited work disseminated widely and replicated within policy
papers of central banks and international financial organizations [b4,
b5, b6 and b8].
- Attendees to presentations and workshops show an interest in adopting
and becoming users of the methodology [b1 and b3].
- Users liaise with Molyneux's team, who act in an advisory capacity to
help develop and implement ideas [b1, b3 and b7].
- Users build, develop and utilise modelling and methodological
approaches based on Molyneux and his teams work to inform public policy
on banking sector competition, efficiency and risk issues in their
region / country / continent [b3 and b5]; which, in turn,
further disseminates the research findings [b8].
Users of the research by Molyneux and his team since 2008 include a wide
range of commercial and public organisations. The research has been
disseminated in seminar presentations, workshops and through advisory
work. The latter includes: AB Bank, Riga (May 2008); International
Monetary Fund, Geneva (June 2008); EVLI (Bank), Helsinki, (August 2008);
University College Dublin / Central Bank of Ireland, Dublin (May, 2009);
Italian Banking Association, Rome (September 2009, January 2010, October,
2010); Italian Leasing Association, Milan (September 2010); Banque
Centrale du Luxembourg & STATEC, Luxembourg (March 2011); Unicredit,
Bologne, (April, 2011); Bank of England, London (November, 2011); European
Central Bank, Frankfurt, (January 2012); FUNCAS (Spanish Savings Banks
Foundation), Madrid (January 2012); Unicredit, Bologne, (April, 2011); and
the Welsh Government, Cardiff (May, 2012).
Selected users and beneficiaries:
Italian Banking Association, Rome (2008, 2009, 2010) Project commissioned
by IstEin (Istituto Einaudi, established in July 2008 by the Italian
Banking Association) and directed by Roberto Violi (Senior Director at the
Bank of Italy) [b1 and b2]. The aim of the project was to
examine banking competition in Europe while "aim[ing] at improving
knowledge of this phenomenon, both in terms of methodology and in terms of
quantitative measurements" [b1]. The research outcomes were
directed towards the Italian banking community as well as the Bank of
Italy and other European regulators. Molyneux and his team attended a
range of workshops (September 2009, January 2010, October, 2010) with
research and operational colleagues from the Bank of Italy, the Italian
Banking Association as well as employees from the main banks including
Unicredit. Molyneux helped co-ordinate workshops and work programmes
undertaken by academics and policymakers on aspects of competition in
European banking using methodological approaches stemming from a1, a2
and a3. This work examined market power aspects of banking systems
using structural and non-structural indicators as well as interactions
between competition, risk and efficiency [b2], some of which
appeared subsequently as a European Central Bank study [a6]. The
significance and reach of the impact of this and Molyneux's earlier
research has been to inform the policy debate on bank competition
(including product pricing and access to finance). This impact is also
evidenced in policy documents from the Bank of Canada [b5],
European Central Bank [b6], Welsh Government [b7] and
African Development Bank [b8].
FUNCAS (Fundación de las Cajas de Ahorros) / Spanish Savings Banks
The research of Molyneux's team has been used by FUNCAS since 2008 to
evaluate industry structure and competition, risk and efficiency linkages
in banking. Some of the work has been pan- European (as is the case of the
work linked to a2, a4, and a6) and some has focused on
Spain, which, in turn "has been of major importance to study the evolution
of banking markets" [b4] in that country. Furthermore, in 2009
Molyneux completed a FUNCAS sponsored project on "Size Revisited in
European Banking" where bank efficiency, value creation and ownership were
analyzed and presented to regional savings banks in Alicante (June, 2008),
Malaga (February 2009), Granada (May 2010), Valencia (November 2010),
Santiago de Compostella (February 2011) and Santander (May, 2012). The
impact of the workshops and the policy advice was to help regional banks
in the adoption and use in their decision making of the analytical
approaches developed by Molyneux and his collaborators.
Other work by Molyneux's team during the 2008-2013 period aimed at
comparing the performance of commercial, savings and co-operative banks.
Here the focus was on ownership features emanating from research
highlighted in [a2] and confirmed by [b3]. Ongoing research
with FUNCAS is investigating ways in which savings banks can boost their
efficiency without impacting adversely on risk. Molyneux's team work
worked closely with staff at individual banks to assist them in
incorporating the methodological innovations into their decision-making
processes. In addition to annual workshops and advisory work, Molyneux
disseminates the results of his team's research to staff at savings banks
through regular contributions to FUNCA's annual Papeles de la Economía
Española publication (in Spanish).
Welsh Government's Access to Finance Review
In 2013 Molyneux was invited to be a member of the advisory group
reviewing whether High Street banks are meeting the financing needs of
Welsh SME's, and the difficulties in gauging whether the competitive
environment is promoting or inhibiting credit availability in the country.
One aspect of this review notes the difficulties in measuring competition
in banking (based on a1 and a6) and thus confirms the impact of
this research in informing policy [b7].
International Organisations and Central Banks
During the 2008 to 2013, the research of Molyneux's team on non-structural
measures of banking sector competition, efficiency and risk has been cited
by an extensive array of influential policy documents of international
financial organizations as diverse as the Group of 20 (G20) [b4]
and the African Development Bank [b8]. This is further
corroboration of the impact of Molyneux's research on policy formulation
at the international level.
Sources to corroborate the impact
[b1] Letter from the Senior Director, Portfolio Management Dept.,
Banca d'Italia (Bank of Italy)
[b2] Details of the Italian Banking Association project and
outputs (working papers 1,2,3 and 10) can be seen at :
"The purpose of the [European Banking Competition] project is to carry out
a research study concerning "Banks and Competition in Europe" specifically
aimed at improving knowledge of this phenomenon, both in terms of
methodology and in terms of quantitative measurements....Two topics have
been studied in detail: 1) `Competition in the European Banking Sector',
coordinated by Professor Philip Molyneux (Bangor Univerisity);..."
[b3] Letter from the President of Funcas (Fundación de las Cajas
de Ahorros) — the Spanish Savings Banks Foundation,
[b4] G 20 Workshop on Competition in the Financial Sector,
co-organized by Bank of Indonesia and Banco de Mexico on
February 16-17, 2008,
(work cited on pp 327 and 330).
[b5] Bank of Canada (2010) Étienne Bordeleau and Christopher
Graham, The Impact of Liquidity on Bank Profitability, Bank of Canada
Working Paper 2010-38, December (work cited on pp. 6 and 8) http://www.bankofcanada.ca/wp-content/uploads/2010/12/wp10-38.pdf
[b6] European Central Bank (2010) Does Monetary Policy Affect Bank
Risk-Taking, Y. Altunbas, L. Gambacorta and D. Marqués-Ibáñez, ECB Working
Paper, No 1166, March (work cited on p. 27) http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1166.pdf
[b7] Welsh Government's (2013) Access to Finance Review. Member of
the voluntary advisory group reviewing whether high street banks are
meeting the financing needs of Welsh SME's and if the competitive
environment is promoting or inhibiting credit availability in the country.
(work cited on p. 32).
"..there is increased interest in the growing role of the Swedish Bank
Handelsbanken, with its localised approach, as a supplier of capital to
the SME sector in Wales [Various studies emphasise that concentration may
not be a good indication of competitive behaviour... See [a1, a4].."
[b8] African Development Bank (2013) A. M. Simpasa, Competition
and market structure in the Zambian banking sector, African Development
Bank Working Paper, 168, January, Tunis: African Development Bank.
(work cited on p. 7). "Table 4: Interpretation of the Panzar-Rosse
H Statistic. Source: [a1]" (p.7).