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Federal Reserve Bank of Chicago
Real Effects of Bank Competition
Nicola Cetorelli
WP 2004-03
Real Effects of Bank Competition*
NICOLA CETORELLI
Federal Reserve Bank of Chicago
Wharton Financial Institutions Center
University of California - Davis
Abstract
Does banking market power contribute to the formation of non-financial industries populated by
few, large firms, or does it instead enhance industry entry? Theoretical arguments could be made
to support either side. The banking industry of European Union (EU) countries has been
significantly deregulated in the early 1990s. Under the old regime, cross-border expansions were
heavily constrained, while after deregulation banks from EU countries have instead been allowed
to branch freely into other EU countries. Concurrently to the process of deregulation, European
banking industries have also experienced a significant process of consolidation. Exploiting such
significant innovations affecting the banking industries of EU countries, this paper explores
whether changes in bank competition have in fact played a role on the market structure of nonfinancial industries. Empirical evidence is derived from a panel of manufacturing industries in 29
OECD countries, both EU and non-EU members, adopting a methodology that allows controlling
for other determinants of industry market structure common across industries, across countries or
related to time passing. The evidence suggests that the overall process of enhanced competition in
EU banking markets has lead to markets in non-financial sectors characterized by lower average
firm size.
JEL Classification Codes: L2, G2, G3
*
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago
or the Federal Reserve System. I have benefited from the comments of participants to the World Bank Conference on
Bank Concentration and Competition and the Federal Reserve Bank of Cleveland 2003 Annual Conference on Banking
Consolidation and Competition. I especially thank Andy Winton, Rich Rosen, an anonymous referee and the Editors
for their insights and suggestions on how to improve the paper.
1
1. Introduction
This paper analyzes the effect of bank deregulation and bank concentration on the market
structure of non-financial sectors. The focus on Europe is justified by the significant
structural changes of the banking industry witnessed in European Union (EU) countries
during the 1990s. Similar to the U.S. own experience over the same period of time, the
number of banks in operation has reduced substantially in many European countries, a
process that may have had an important impact on banks’ competitive conduct. At the
same time, and in an effort to more toward a single, competitive market for financial
services, EU countries have also implemented significant banking deregulation,
culminated in 1993 with the passage of the Second Banking Coordination Directive.
Before the enforcement of the new regulation, cross-border expansions were subject to
the authorization and subsequent control of the host country, as well as to capital
requirements. Under the current regime, banks from EU countries can instead branch
freely into other EU countries. By removing substantial barriers to entry, the new
legislation specifically aimed at generating significant improvements in the competitive
conditions of financial markets.1 This study estimates the effect of bank concentration
and bank deregulation on the market structure of non-financial industries, using a panel
of both EU and non-EU member countries.
A growing body of research work has been devoted in recent years to analyzing the role
played by financial markets in real economic activity. The theoretical conjecture that
1
Empirical evidence consistent with this prior is provided, for instance, in Angelini and Cetorelli, (Forthcoming).
2
financial markets should matter for economic growth is hardly recent, tracing back at
least to Schumpeter (1912). The contemporary empirical work is also inspired by the
previous contributions of Goldsmith (1969), Gurley and Shaw (1967), and McKinnon
(1973). The revival of this literature in the last decade was inspired in large part by the
fact that extensive and reliable cross country data sets had become available in the 1980’s
(e.g., Penn World Tables), and by the lingering theoretical debate about the actual
importance of financial markets for real economic activity. The work that has followed,
e.g. King and Levine (1993 a,b), Demirguc-Kunt and Maksimovic (1998), Levine and
Zervos (1998), Rajan and Zingales (1998), Levine, Loayza and Beck (2002) and many
others, has provided robust empirical evidence that broader, deeper financial markets are
strongly associated – causally - with better prospects for future economic growth.
Having established this basic finding, the research effort is now focused on the analysis
of the mechanisms through which finance affects growth: what are the specific
characteristics of financial markets that seem to be associated with lower or higher
growth prospects? For example, does it matter whether banks are privately or government
owned (La Porta, Lopez-de-Silanes and Shleifer, 2001), or whether there is higher or
lower protection for financial contracts (Levine, 2000), or whether banks are in a more or
less competitive environment (Jayaratne and Strahan, 1996, Cetorelli and Gambera,
2001)? And related to this, just what aspects of firms and industries are impacted by
finance so that it eventually translates into more economic growth?
This paper focuses on addressing precisely this last question and it is the natural
continuation of a research agenda in which I explore the role of banking market structure
3
on the market structure of industrial sectors. 2
In recent years, much theoretical and empirical work has examined the economic role of
banking market power. Challenging the customary view that a lack of competition in the
banking industry is unequivocally detrimental to social welfare, authors have suggested
that concentration of market power may in fact enhance the role of banks as information
producers in their lending activity and their willingness to establish close lending
relationships with their client firms.3
This paper contributes to a new dimension of analysis, investigating the effect of bank
concentration on the market structure of industrial sectors: does concentration of market
power in the banking industry lead banks to concentrate funding toward a few firms of
large size, or does bank concentration foster entry of new firms over the life cycle of an
industry, thus contributing to maintaining an unconcentrated market structure? For this
purpose, the innovations that have taken place across EU banking markets make a good
example of a case study where to apply empirical methodologies characteristic of
“natural experiments” type of settings.
The role of banking market structure on the market structure of industrial sectors has not
received much attention so far in the mainstream economic literature. Scattered evidence
is found in the work of history scholars. For example, in his study of Italian
industrialization in the late nineteenth century, Cohen (1967) describes how a quasi-
2
This paper is closely related to Cetorelli (2001) where I have developed the basic rationale behind the relationship
between banking and non-financial industry market structure.
3
See, e.g., Pagano (1993) and Guzman (2000) for theoretical arguments suggesting that banking market power reduces
equilibrium credit, thereby generating a negative effect on economic growth. Petersen and Rajan (1995), Shaffer
(1998), Cao and Shi (2000), Dell’Ariccia (2000), Manove, Padilla and Pagano (2000), Cetorelli and Peretto (2000)
identify instead potentially positive effects associated with banking market power.
4
monopolistic banking industry “...led to the emergence of concentration of ownership and
control in the new and rapidly growing sectors of the industrial structure”. Capie and
Rodrik-Bali (1982) note that the intense process of consolidation and increase in
concentration that characterized British banking in the early 1890’s preceded that
experienced later on by manufacturing industrial sectors. Similarly, Haber (1997) and
Maurer and Haber (2002), report a very close connection between bank and industry
concentration in mid- to late-nineteenth-century and early-twentieth-century Mexico. The
general impression from historical studies that bank concentration should be associated
with concentrated industries is finally expressed by Cameron (1967) in his renowned
study on banking in the early stages of industrialization, where he states that
“...Competition in banking is related to the question of competition in industry. In general
the two flourish – and decline – together. Whether this phenomenon is a joint by-product
of other circumstances, or whether it results from the decline or restriction of competition
among banks, is a matter worthy of further research. It is a striking coincidence, in any
case, that industrial structure – competitive, oligopolistic, or monopolistic – tends to
mirror financial structure.”
What are the economic mechanisms through which a characteristic of the banking
industry such as its market structure should have anything to do, possibly in a causal
sense, with the market structure of industrial sectors? While a formal theoretical model
focusing on this relationship is still missing, we can delve on the existing literature on the
economic role of banking market structure to formulate alternative theoretical
conjectures. To this end, the framework proposed by Petersen and Rajan (1995)
5
represents a good foundation from which to ponder the role of banking market structure
on the market structure of non-financial industries. Petersen and Rajan argue that young
and unknown firms have easier access to credit if banks have market power. In their
reasoning, banks with market power fund young firms with the expectation that they will
be capable of extracting future rents once those firms eventually become profitable.
Following their reasoning one could argue that banks with market power, pursuing their
goal of profit maximization, should always attempt to select the best available pool of
entrepreneurs, thus favoring new entrants along the entire life cycle of an industry. This is
because new entrants are potentially endowed with higher return projects and more
innovative technologies that would guarantee ever increasing profit-sharing opportunities
for the banks.
Yet, maintaining the same premises in the Petersen and Rajan model, it is also legitimate
to envision completely different economic forces at play, which could lead to opposite
conclusions. The basic argument in Petersen and Rajan relies on the formation of longtime lending relationships and on the value that inheres to such relationships for the bank.
The latter is represented in their work by the present value of the future stream of profits
of those firms the bank originally helped start up, firms that eventually become the
industry incumbents. A possible theoretical “tension” embedded in this argument lies in
the fact that the profitability of the older bank clients (and thus the bank’s own
profitability) will be affected by the entry of new firms. In recent papers, Cestone and
White (Forthcoming) and Spagnolo (2002) have presented theoretical frameworks in
which existing lending relationships do indeed affect the behavior of lenders vis-à-vis
potential new borrowers. The less competitive the conditions in the credit market, the
6
lower the incentive for lenders to finance newcomers. Hence, financial market
competition can represent a form of barrier to entry in product markets.4 This theoretical
argument would then suggest that bank concentration should enhance industry
concentration.
Judging by the formulation of these alternative conjectures, the effect of bank
concentration on industry market structure is therefore theoretically ambiguous.
Empirical evidence presented in a series of recent papers indicate that in fact higher bank
concentration and more banking market power are associated with higher industry
concentration. Cetorelli (2001) provides evidence that bank concentration leads to larger
average firm size in non-financial sectors. Cetorelli and Strahan (2003) show that the
effect is not only limited to an impact on the first moment of the size distribution but that
higher bank concentration and market power have an impact on the entire distribution of
firm size. With a focus on the entire industry life-cycle dynamics, Cetorelli (2003) show
evidence that more bank concentration implies less entry and thriving of younger firms
and also delayed exit of older firms. Finally, using cross-country, firm-level data, Beck,
Demirguc-Kunt and Maksimovic (2003) find evidence that more bank concentration is
associated with more financing obstacles, especially for smaller firms.
This paper gathers empirical evidence on the effect of changes in banking market
structure on average firm size in 27 manufacturing sectors in 28 OECD countries over
time. It confirms that sectors where incumbents are more dependent on external sources
4
This work is itself based on contributions to the issue of product market competition, such as Brander and Lewis
7
of finance have a disproportionately larger average firm size if they are in countries with
a more concentrated banking industry. The evidence also indicates that such an effect of
bank concentration on industry market structure is substantially reduced, if not reverted,
for countries after becoming members of the European Union. Moreover, the EU-specific
industry deregulation associated with the implementation of the Second Banking
Directive has also lead to less concentrated non-financial industries.
2. Methodology and data
This section describes the empirical model used to identify the effects of bank
concentration and bank deregulation on firm size and provides detailed information on
the data set.
Kumar, Rajan and Zingales (2001) identify several industry-specific and country-specific
factors as possible determinants of industry firm size. For instance, the degree of capital
intensity, the amount of employed human capital and the R&D intensity are all possible
characteristics, among many others, that are likely to affect an industry’s market
structure. Likewise, the quality of the judicial system, the set of laws and regulation, the
level of economic and financial development are some of those “environmental” factors,
common across industries in a country, which are also likely determinants of firm size.
Identifying the overall effect on firm size of bank concentration (or bank deregulation),
which varies by country and over time, would inevitably raise important concerns
regarding the possibility of reverse causality and omitted variable biases. This problem is
well-understood now in the literature on finance and real economic activity (see, e.g.,
(1986), Chevalier (1995), Kovenock and Phillips (1995, 1997), Maksimovic (1988).
8
Rajan and Zingales, 1998).
The effect of bank concentration on firm size can still be identified, however, measuring
the differential effect across industrial sectors, absorbing the common effect to all sectors
(of bank concentration and any other factor with both country and time variability)
through the inclusion of vectors of indicator variables. More precisely, identification can
be achieved estimating the following model specification:
Avg. Firm Sizeijt = α it + β j + δ ⋅ Bank Concentrationit ⋅ Ext.Dep.Incumbents j +
(1)
+ η ⋅ Bank Concentration EU it ⋅ Ext.Dep.Incumbents j +
+ Γ ⋅ Additional controls ijt + ε ijt
Average firm size is measured for each sector j, in country i and time t. The above
mentioned common effect is absorbed by α it , a vector of indicator variables capturing
the country*time specific component of firm size, while β j is a vector of indicator
variables capturing the industry-specific component of firm size. The effect of bank
concentration is identified by the term of interaction with an industry-specific variable
measuring the level of dependence from external sources of finance of incumbent firms.
The argument is that if bank concentration has any effect on firm size, this effect should
be especially noticeable on those sectors where incumbent firms are still in need of
external sources of funds: As Rajan and Zingales (1998) observed, industrial sectors
differ from one another, for technological reasons, in terms of the degree of dependence
on external sources of finance. For example, sectors such as Tobacco, Food, or Beverages
have much lower needs for external funding than sectors such as Machinery or
Professional and Scientific Equipment. What is also true is that external financial
9
dependence varies with the age profile of a firm. That is, when young, firms in almost all
sectors display a positive need for external funds, while they maintain such needs at later
stages in the life cycle only in a fraction of sectors5. Now, from the theoretical
underpinnings illustrated above, we gather that bank concentration may play a role in
industries’ market structure in that banks in concentrated markets may choose to privilege
their older clients. Indeed the conjecture is about competition for funding between
industry incumbents and newer entrants. Hence, in sectors where incumbents are not
dependent on external funding there will not be any competition for resources with
entrants, and bank concentration should not matter much as a determinant of firm size in
those sectors. If there is any effect to pick up in the data, we should find evidence of it by
focusing on those sectors where in fact old firms, the incumbents, are still in need for
external funds and therefore compete for them with the younger firms.
Consequently, if bank concentration means more favorable lending conditions for older
firms, then we should expect that average firm size in sectors where old, incumbent firms
are still in need for external finance will be disproportionately larger, all else equal, in
countries with high bank concentration (the estimate of the coefficient δ will be positive
and significant). The opposite would be true if instead bank concentration creates better
lending conditions for the younger firms. Note that since it has variability across all three
dimensions, the term of interaction is identifiable even in the presence of the vectors of
indicator variables.
In the same model specification, the following term of interaction identifies the
differential effect of bank concentration in EU countries, and it is the product of the first
5
In our dataset, 16 out of 26 sectors display a positive need for external finance for mature firms.
10
term of interaction with a dummy equal one for EU countries, from the year they become
members.
Average firm size is measured either as the natural logarithm of the ratio of value added
and number of establishments, or as the natural logarithm of the ratio of total
employment and number of establishments, both for each sector j, in country i and time t.
The data on manufacturing sectors at three-digit, second-revision ISIC level of
disaggregation for 29 OECD countries is extracted from a data set put together by the
United Nations Industrial Development Organization (UNIDO). The time series
availability varies by country but it spans from 1980 to 1997. Both value added and total
employment are common indicators of firm size, and both possibly superior measures
with respect to an indicator of output production (see, again, Kumar, Rajan and Zingales,
2001, p. 10-11). The UNIDO data set does not provide any more detailed information
within an industry in a country than the number of operating establishments, i.e. the plant,
or factory where production occurs. Hence, our measure of firm size is proxied by the
average size of an industrial establishment. This may imply some measurement error in
our dependent variable induced by the fact that large firms often own many
establishments. However, the existence of a close correlation between the number of
establishments and the number of firms has been documented in Cetorelli (2001) for a
cross-section of countries. Similarly, the rate of creation of new businesses is correlated
with the share of new establishments in a local economy (Black & Strahan, 2002).
Bank concentration measures the 3-firm ratio in each country i and time t, and it is
multiplied by an indicator variable equal to one for sectors where mature firms (more
than 10 years old) have above-median level of dependence on external sources of finance.
11
The cross-country data on bank concentration is from Demirguc-Kunt and Levine (2001)
and it spans from 1990 to 1997. The data on external financial dependence is instead
from Rajan and Zingales (1998). It is measured on U.S. listed companies and it is
computed as the fraction of capital expenditure not financed with cash from operations,
as an average over the 1980-1990 decade.6
The competitive effect associated with the implementation of the Second Banking
Directive is identified using a similar model specification:
(2)
Avg. Firm Sizeijt = α it + β j + λ ⋅ Bank Deregulationit ⋅ Ext.Dep.Incumbents j +
+ Ψ ⋅ Additional controls ijt + ε ijt
where bank deregulation is an indicator variable which takes value one for those
European countries that are members of the European Union, either after 1993 (the year
the Second Banking Directive was implemented) or after the country becomes a member
of the EU, whichever comes later.7 The improvement in competitive conditions in EU
banking markets after deregulation should have an opposite impact on average firm size
than that of bank concentration identified with model (1). More precisely, if bank
concentration implies a larger average firm size in sectors where old firms are still
dependent on external finance, an improvement in bank competition via deregulation
6
Rajan and Zingales (1998) argue that the “dependence of U.S. firms on external finance [is] a good proxy for the
demand for external funds in other countries” (Rajan and Zingales (1998), p. 563–65).
7
Belgium, Germany, France, Italy, Luxembourg and the Netherland joined the EU from its inception in 1950.
Denmark, Ireland and the United Kingdom joined in 1973, Greece in 1981, Spain and Portugal in 1986, Austria,
Finland and Sweden in 1995. In addition to its 15 current Member States, the EU is preparing for the accession of other
13 eastern and southern European countries.
12
should imply easier access to credit for industry entrants and therefore a lower average
firm size.
In both models I have also included, as additional control variable, the share of total
manufacturing value added for each sector j, country i and time t, also constructed using
the UNIDO data set. In studies of cross-sector industrial growth, the share of total
manufacturing value added consistently predicts that sectors that had grown substantially
in the past, and therefore are already relatively large, grow less in the future (see Rajan
and Zingales, 1998 and Cetorelli and Gambera, 2001). Moreover, theories of an
industry’s life-cycle predict that a sector that has already grown substantially should
experience less intensive firm entry (see Klepper [15]). Hence, the share variable controls
for the stage in industry life-cycle a sector is in, and specifically it should capture the
different intensity in entry due to life-cycle specific reasons: all else equal, a larger and
more mature sector should be expected to have a larger average firm size.
To further sharpen the identification strategy, I have also included terms of interaction
between external financial dependence of incumbent firms and variables proxying for the
stage of development of various sectors of the financial industry. One could make the
argument, for example, that bank concentration or banking regulation evolves as a
function of the stage of development the overall financial industry is in. If that were the
case, then the bank concentration interaction term, or the bank deregulation one, could be
picking up the effect associated with other variables, unrelated to the theoretical priors
under investigation. The additional terms of interaction were between external financial
dependence and bank development, proxied by the ratio of private credit by deposit banks
and other financial institutions to GDP, stock market development, proxied by the stock
13
market turnover ratio, and bond market development, proxied by the ratio of private bond
market capitalization to GDP. Data on these three additional variables was also gathered
from Demirguc-Kunt and Levine (2001).
Table 1 shows the pattern of average firm size and bank concentration across countries
and Table 2 the pattern of average firm size and external financial dependence across
industrial sectors.
3. Empirical results
1. The effect of bank concentration on industry market structure
Table 3 presents the first set of results where I estimated the differential effect of bank
concentration across industries, for all countries without distinction between EU and nonEU members. These estimations were obtained to verify the degree of consistency with
those in Cetorelli (2001). The main difference was that in Cetorelli (2001) the data set
included a cross-section of manufacturing industries in OECD countries but without a
time series dimension. The dependent variable is either the logarithm of value added over
number of establishments or the logarithm of total employment and number of
establishments.
In all regressions the share of value added variable is consistently positive and
significant, as a priori expected. As reported in the first two columns, irrespective of the
choice of dependent variable, bank concentration appears to have a positive and
significant effect on industry market structure. The average firm size of sectors where
older firms are still dependent on external finance is significantly larger in countries
characterized by high bank concentration. To offer an indication of the economic
14
significance of such effect, let us focus on the results in the second column. A sector
where older firms are still dependent on external finance will have an average firm size
about 3 % larger than a sector where older firms are not dependent on external finance if
bank concentration were to increase from the first to the third quartile of its distribution.
Considering that the unconditional absolute difference in firm size between high- and
low-dependence sectors is about 2.5 %, such an impact determined by a change in bank
concentration is economically significant.
The third and fourth columns present estimation results where the interaction terms with
proxies for financial markets development were included. The bank concentration
interaction term maintains sign and significance. Incidentally, two of the three additional
regressors are significant with a negative sign. This is actually economically sensible: one
would expect that as financial markets develop, access to external finance improves thus
making younger firms more likely to enter, and therefore contributing the average firm
size to be, all else constant, smaller.
The last two columns report additional regression results where I restricted the sample to
European countries only (both EU and non-EU members). The results show that the
coefficient of the bank concentration interaction is actually larger in magnitude and still
significant.
The results of this first table are therefore consistent with theoretical priors suggesting
that banks with market power may have the tendency to preserve relationships with their
older clients, which grow larger, at the expense of potential new entrants. This result is
also (reassuringly) consistent with that obtained in Cetorelli (2001).
Next, I have tested whether the effect of bank concentration would be different for
15
European countries once they become members of the European Union. To a great
extent, EU states can be considered as having a higher degree of homogeneity, defined in
terms of common implementation of EU-wide directives and commitment to common
policies of open markets. The EU membership may thus result in a competitionenhancing effect. Consequently, for EU-member countries defining bank concentration
on the basis of national boundaries may become unsuitable. Table 4 presents the results
of regressions including a differential term of interaction for EU member countries. The
estimated coefficient for this term is consistently negative across all specifications,
although it is not significant in two of the specification where firm size is measured in
terms of value added. The results overall indicate that EU membership is associated with
a more overall competitive environment. In this environment, potential industry entrants
are less constrained by the financial barrier to entry that a concentrated banking market
may represent. Bank concentration thus indeed loses relevance for EU-member countries.
So, for example, focusing on the results reported in the second column, the differential
effect on firm size of bank concentration in EU-member countries is only half the
magnitude than that for the other countries in the control group.
2. The effect of bank deregulation
Last, I have tested the direct effect of the implementation of the Second Banking
Directive. As described in introduction, such piece of EU-wide deregulation of the
banking industry removed important barriers to entry in banking markets, thus
contributing to enhance the overall level of bank competition in EU countries. Table 5
presents the results of regressions where I have included an interaction term between the
16
external financial dependence variable with a dummy equal one for EU countries after
1993, when the Second Banking Directive was implemented, or after the year a country
became member of the EU, whichever comes later. As the results indicate, this term of
interaction is negative and it is significant for all but two of the regressions, again, two of
those where the dependent variable is measured in terms of value added. The overall
indication is, however, that following deregulation, EU banking markets have become
more competitive and this seems to have been translated into easier entry and less
concentration in non-financial industries.8
4. Conclusions
This paper has contributed to investigate a new dimension of analysis of the economic
role of bank concentration and competition. The results show that sectors where old firms
are more in need of external finance are of disproportionately larger size if they are in
countries whose banking sector is more concentrated.
This result is consistent with theoretical priors suggesting that market power gives banks
an implicit equity stake in the firms with whom they have already established long lasting
relationships. The evidence also seems to imply that bank market power may represent a
financial barrier to entry in non-financial industries.
The results have also shown, however, that such effect of bank concentration is
substantially weakened in EU-member countries, indicating that in the more
8
One should remark, however, that the data set does not extend too many years after 1993 (it ends in
1997). Hence one should refrain from making strong statements based on this data set about the long-run
overall effects of changes in bank competition on the market structure of non-financial industries, a
17
“competition-proned” environment of the European Union firms have easier access to
funds, thus reducing the influence of bank concentration on the market structure of nonfinancial industries. Similarly, the empirical evidence also suggests that pro-competitive
deregulation of the banking industry, such as the EU-wide implemented Second Banking
Directive, has contributed to reduce the average firm size of non-financial sectors.
To the extent that changes in bank competition leads to more or less concentrated
industries, this analysis exposes a potential link between characteristics of the banking
industry and firms’ conduct in other industrial sectors. For example, depending on market
structure, firms may have different pricing strategies for their products or different
incentives for technology adoption. Therefore, regulation that directly affects the market
structure of the banking industry will also have effects, perhaps undesirable, down the
line in non-financial product markets. These considerations point to novel directions of
analysis of the impact of banking market structure on social welfare.
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21
Table 1: Average Firm Size and Bank Concentration Across Countries
Country
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany West
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea, Rep.
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Ln(va/no.est.)
14.33775
14.98726
13.98336
15.00872
12.0781
14.45874
14.91703
Ln(Emp./no.est.)
3.68393
4.495798
3.562576
4.137156
5.734251
3.673602
4.242352
15.81104
13.70816
14.70301
12.67111
14.07746
14.77086
14.5518
14.1841
14.63149
15.84689
15.49991
12.99911
14.50926
15.41152
13.22094
13.57518
15.21361
5.053391
3.84133
6.073357
2.2798
3.756913
4.179225
3.369591
3.878878
4.231299
5.9216
4.736675
2.794762
3.914007
6.503342
3.681847
3.199897
4.441467
14.85739
14.41054
15.12917
4.9535
3.814538
4.056541
Bank Concentration
.6482356
.7219185
.6476625
.5837914
.8646001
.7437906
.8828248
.414438
.4549705
.7693471
.6998351
1
.7350337
.3562633
.2170099
.3126329
.3838012
.5836384
.7380463
.6939822
.8405356
.5034863
.4578493
.4737538
.8831108
.7590806
.4376526
.5565007
.1864721
Bank concentration is the sum of market shares (measured in total assets) of the three
largest banks in each country. The data on individual banking institutions varies by
country but it spans for the period 1990-1997. The values reported are averages over the
sample period. The figures for firm size are calculated as simple averages for each
country across all industries and over time.
Table 2: Average Firm Size and External Financial Dependence
Across Industrial Sectors
Isic
Sector
Ln(va/no.est.)
Ln(Emp./no.est.)
311
313
314
321
322
323
324
331
332
341
342
351
352
353
354
355
356
361
362
369
371
372
381
382
383
384
385
390
Food
Beverages
Tobacco
Textiles
Wearing Apparel
Leather
Footwear
Wood Products
Furnitures and Fixtures
Paper and Products
Printing and Publishing
Industrial Chemical
Other Chemicals
Petroleum Refineries
Petroleum and Coal Products
Rubber Products
Plastic Products
Pottery, China etc.
Glass and Products
Non-Metallic Products
Iron and Steel
Non-Ferrous Metals
Metal Products
Non-Eletrical Machinery
Electrical Machinery
Transport Equipment
Professional Goods
Other Manufacturing
14.08678
15.38108
17.15729
13.99757
13.25029
13.24073
13.61598
13.14599
13.15987
15.00423
13.82034
15.71694
15.06287
17.72687
14.53268
14.86087
13.9431
14.06791
14.73027
14.13102
15.73547
15.27572
13.71522
14.28047
14.92107
14.99909
14.15431
13.31041
3.888206
4.436783
5.618409
4.031199
3.618692
3.306214
3.947371
3.173224
3.260224
4.544604
3.555834
4.910531
4.365358
5.888985
3.792876
4.552456
3.727345
3.984686
4.338665
3.668588
5.272175
4.781541
3.604358
4.027712
4.603697
4.767653
3.979891
3.263575
External
Dependence
-0.0520653
-0.1463893
-0.3754666
0.1410054
-0.0201083
-1.330175
-0.5728263
0.2491902
0.329176
0.1043816
0.1358248
-0.1836157
-0.0217111
0.1620249
-0.1225661
0.1633804
0.0310358
0.1519385
0.0870939
0.0731368
0.0437072
0.2166062
0.2300215
0.1632407
0.1936534
-0.0513038
The figures for firm size are calculated as simple averages for each sector across all
countries and over time. External financial dependence relates to mature companies (more than
ten years old), and is the fraction of capital expenditures not financed with cash flow from
operations. It is measured on U.S. listed companies during the 1980’s.
Table 3: Effect of Bank Concentration on Average Firm Size
Average firm size measured in terms of
Variable
Value added
Employment
Value added
Employment
Value added
Europe
Employment
Europe
Share value addedijt
1.596***
[0.165]
1.412***
[0.137]
1.777***
[0.183]
1.252***
[0.157]
1.705***
[0.219]
1.180***
[0.188]
Bank concentration it * Old
firms external dependence j
0.424***
[0.103]
0.381***
[0.088]
0.320***
[0.116]
0.330***
[0.099]
0.563***
[0.167]
0.568***
[0.143]
Bank development it * Old
firms external dependence j
-0.208***
[0.052]
-0.119***
[0.044]
-0.327***
[0.084]
-0.229***
[0.071]
Stock market developmentit * Old
firms external dependence j
-0.136**
[0.066]
-0.023
[0.057]
0.032
[0.089]
0.133*
[0.076]
Bond market development it * Old
firms external dependence j
0.039
[0.130]
0.079
[0.112]
0.032
[0.146]
0.072
[0.125]
2678
0.79
2665
0.67
1814
0.77
1800
0.67
Observations
R-squared
2867
0.78
2857
0.66
The dependent variable is the natural logarithm of either value added or total employment divided by the total number of
establishments in sector j, country i and year t. Share value added is the fraction of value added of sector j, country i, at time
t over total manufacturing value added in country i at time t. Bank concentration is the 5
-firm ratio for the banking industry of
country i at time t. Old firms external financial dependence is a dummy equal to one for sectors where mature firms (> 10 years old)
have above-median needs for external sources of funding. Bank development is the ratio of private credit by deposit banks and other
financial institutions to GDP, stock market development is the stock market turnover ratio and bond market development is the ratio
of private bond market capitalization to GDP. All regressions were performed including a vector of industry dummies and a vector of
country*year dummies but coefficients are not reported. * significant at 10%; ** significant at 5%; *** significant at 1%.
Table 4: Effect of Bank Concentration on Average Firm Size.
Differential Effect for EU Member Countries
Average firm size measured in terms of
Variable
Value added
Employment
Value added
Employment
Value added
Europe
Employment
Europe
Share value addedijt
1.595***
[0.165]
1.409***
[0.137]
1.779***
[0.183]
1.257***
[0.157]
1.701***
[0.219]
1.178***
[0.187]
Bank concentration it * Old
firms external dependence j
0.433***
[0.103]
0.407***
[0.088]
0.326***
[0.116]
0.343***
[0.099]
0.482***
[0.171]
0.452***
[0.146]
Bank concentration EU it * Old
firms external dependence j
-0.062
[0.075]
-0.193***
[0.065]
-0.105
[0.078]
-0.191***
[0.067]
-0.209**
[0.095]
-0.306***
[0.081]
Bank development it * Old
firms external dependence j
-0.216***
[0.052]
-0.133***
[0.044]
-0.293***
[0.085]
-0.177**
[0.072]
Stock market developmentit * Old
firms external dependence j
-0.146**
[0.067]
-0.039
[0.057]
-0.001
[0.091]
0.085
[0.077]
Bond market development it * Old
firms external dependence j
0.059
[0.131]
0.112
[0.112]
0.029
[0.146]
0.066
[0.125]
2678
0.79
2665
0.67
1814
0.77
1800
0.67
Observations
R-squared
2867
0.78
2857
0.66
The dependent variable is the natural logarithm of either value added or total employment divided by the total number of
establishments in sector j, country i and year t. Share value added is the fraction of value added of sector j, country i, at time
t over total manufacturing value added in country i at time t. Bank concentration is the 5
-firm ratio for the banking industry of
country i at time t. Old firms external financial dependence is a dummy equal to one for sectors where mature firms (> 10 years old)
have above-median needs for external sources of funding. Bank concentration EU is the product of bank concentration and a dummy
equal one for EU member countries (starting in the year they become members). Bank development is the ratio of private credit by
deposit banks and other financial institutions to GDP, stock market development is the stock market turnover ratio and bond market
development is the ratio of private bond market capitalization to GDP. In the last two columns, the data set was restricted to
European countries only, both EU and non-EU members. All regressions were performed including a vector of industry dummies and a
vector of country*year dummies but coefficients are not reported. * significant at 10%; ** significant at 5%; *** significant at
1%.
Table 5: Removal of Barriers to Entry in EU Banking Markets
Average firm size measured in terms of
Variable
Value added
Employment
Value added
Employment
Value added
Europe
Employment
Europe
Share value addedijt
2.800***
[0.140]
1.902***
[0.114]
1.828***
[0.193]
1.291***
[0.165]
1.644***
[0.224]
1.143***
[0.190]
Bank deregulationit * Old
firms external dependence j
-0.159***
[0.049]
-0.213***
[0.041]
-0.039
[0.057]
-0.157***
[0.049]
-0.099
[0.079]
-0.276***
[0.067]
Bank development it * Old
firms external dependence j
-0.226***
[0.055]
-0.127***
[0.047]
-0.184**
[0.083]
-0.089
[0.069]
Stock market developmentit * Old
firms external dependence j
-0.167**
[0.070]
-0.025
[0.060]
-0.044
[0.091]
0.098
[0.077]
Bond market development it * Old
firms external dependence j
0.075
[0.133]
0.114
[0.113]
0.066
[0.150]
0.117
[0.127]
2540
0.78
2531
0.66
1738
0.76
1728
0.66
Observations
R-squared
7853
0.73
7839
0.62
The dependent variable is the natural logarithm of either value added or total employment divided by the total number of
establishments in sector j, country i and year t. Share value added is the fraction of value added of sector j, country i, at time
t over total manufacturing value added in country i at time t. Bank deregulation is a dummy equal to one for EU member countries
based on the following rule: Max{year=1993, year=year country joins EU}. Old firms external financial dependence is a dummy equal
to one for sectors where mature firms (> 10 years old) have above-median needs for external sources of funding. Bank development is
the ratio of private credit by deposit banks and other financial institutions to GDP, stock market development is the stock market
turnover ratio and bond market development is the ratio of private bond market capitalization to GDP. All regressions were
performed including a vector of industry dummies and a vector of country*year dummies but coefficients are not reported. *
significant at 10%; ** significant at 5%; *** significant at 1%.
Working Paper Series
A series of research studies on regional economic issues relating to the Seventh Federal
Reserve District, and on financial and economic topics.
Does Bank Concentration Lead to Concentration in Industrial Sectors?
Nicola Cetorelli
WP-01-01
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Craig Burnside, Martin Eichenbaum and Sergio Rebelo
WP-01-02
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Douglas D. Evanoff and Larry D. Wall
WP-01-03
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Susanto Basu, John G. Fernald and Matthew D. Shapiro
WP-01-04
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Richard J. Rosen
Learning-by-Doing, Scale Efficiencies, and Financial Performance at Internet-Only Banks
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Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans
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Allen N. Berger, Richard J. Rosen and Gregory F. Udell
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WP-01-13
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Jonas D.M. Fisher
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WP-01-17
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Bhashkar Mazumder
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Eric French and John Bailey Jones
WP-01-18
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Daniel G. Sullivan
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WP-02-02
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2
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WP-02-10
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WP-02-11
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WP-02-12
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3
Working Paper Series (continued)
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WP-02-23
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WP-02-26
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WP-02-28
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WP-02-29
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Louis Jacobson, Robert LaLonde and Daniel G. Sullivan
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WP-03-01
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WP-03-02
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4
Working Paper Series (continued)
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A Structural Empirical Model of Firm Growth, Learning, and Survival
Jaap H. Abbring and Jeffrey R. Campbell
WP-03-11
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WP-03-12
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WP-03-13
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WP-03-14
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John Fernald and Brent Neiman
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WP-03-16
Product Market Evidence on the Employment Effects of the Minimum Wage
Daniel Aaronson and Eric French
WP-03-17
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WP-03-18
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WP-03-19
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WP-03-20
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Sujit Chakravorti, Anna Llyina and Subir Lall
WP-03-21
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Katharine Anderson, Lisa Barrow and Kristin F. Butcher
WP-03-22
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5
Working Paper Series (continued)
The Growing Importance of Family and Community: An Analysis of Changes in the
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WP-03-24
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WP-03-25
Trade Deflection and Trade Depression
Chad P. Brown and Meredith A. Crowley
WP-03-26
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WP-03-27
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Michael A. Kouparitsas
WP-03-28
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Marcelo Veracierto
WP-03-29
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WP-03-30
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François R. Velde
WP-03-31
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WP-03-32
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WP-03-33
Self-Employment as an Alternative to Unemployment
Ellen R. Rissman
WP-03-34
Where the Headquarters are – Evidence from Large Public Companies 1990-2000
Tyler Diacon and Thomas H. Klier
WP-03-35
Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve’s
New Discount Window
Craig Furfine
WP-04-01
Netting, Financial Contracts, and Banks: The Economic Implications
William J. Bergman, Robert R. Bliss, Christian A. Johnson and George G. Kaufman
WP-04-02
Real Effects of Bank Competition
Nicola Cetorelli
WP-04-03
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