The cost of market power in banking: social welfare loss vs. inefficiency cost

Abstract

This paper analyses the relationship between market power in the loan and deposit markets and efficiency in the EU15 countries over 1993-2002. Results show the existence of a positive relationship between market power and cost X-efficiency, allowing rejection of the so-called quiet life hypothesis (Berger and Hannan, 1998). The social welfare loss attributable to market power in 2002 represented 0.54% of the GDP of the EU15. Results show that the welfare gains associated with a reduction of market power are greater than the loss of bank cost efficiency, showing the importance of economic policy measures aimed at removing the barriers to outside competition.market power, welfare loss, X-inefficiency, banking