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Journal of Banking and Finance 13 (1989) 6%79.




University College Dublin, Dublin 4, Ireland

Received September 1986, final version received January 1988

This study reviews the performance of banks in twelve countries or territories in Europe, North
America and Aus~ra!ia and examines the internal and external determination of profitability. To
circumvent some of the difficulties in making comparisons between banks in different countries,
the concept of 'value added' is introduced. Results parallel those in domestic U.S. studies and
provide some support for the Edwards-Heggestad-Mingo hypothesis of risk avoidance by banks
with a high degree of market power.

1. Introduction
Many studies of the determinants of bank profitability in the United States
have been undertaken~ including those which have focussed on the relation-
ship between concentration and profitability and those which have examined
the possibility of expense preference behavior existing in regulated and
concentrated industries such as banking (see section 3). H_owever, the.re have
been only three major studies of international bank profitability [Revell
(1980), Short (!977, t979)'1. These works showed that it was possible to
conduct a meaningful analysis in spite of the substantial differences in
accounting practices and legal form between banks in various parts of the
world. Of relevance also is the increased interest internationally in the effects
of augmented competition and deregulation on banking systems and finan-
cial markets.
This paper has the objective of further examining the determinants of
international bank profitability and particularly of reviewing the relevance
of expense preference behavior theories [Edwards (1977)] in this context.
The Edwards-Heggestad-Mingo theory [Edwards and Heggestad (1973);
Heggestad and Mingo (1976)] that higher concentration in banking markets
encourages banks to hold less risky assets and to modify their behavior in

*The generous financial support of Allied Irish Banks for the research leading to this study is
warmly acknowledged, as are the helpful comments of J.R.S. Revell, Brock K. Short, W.K.
O'Riordan and R.P. Kinsella and an anonymous referee.

0378-4266,/89/$3.50 © 1989, Elsevier Sc/ence Publishers B.V. (North-HCland)

66 P. Bourke, Bank profitability

other ways is also examined. The concept of value-added (in addition to

accounting profit) is introduced to assist in overcoming some of the
differences in accounting standards and to allow testing of the expense
preference theories.

2. Data collection
The data is based on the financial statements of 90 banks each year in the
ten years from 1972 to 1981 in twelve countries or territories - Australia,
California, Massachusetts, New York, Canada, Ireland, England and Wales,
Belgium, Holland, Denmark, Norway and Spain. The banks included in the
sample were every bank in these countries which fell within the top 500
banks in the world in June 1980, ranked by total assets.
In so far as possible data were standardised to remove differences in local
accounting practices particularly in relation to the treatment of reserves.
Contrary to common practice, total assets are defined to include acceptances
on both sides of the balance sheet. This is largely a matter of convenience as
Spanish banks conduct a large part of their business through the acceptance
mechanism; my approach and the conventional approach are both subject to

3. Determ|uants of bank profitability

The literature divides the determinants of bank profitability into factors
internal ar.d external to the bank. Many of the internal determinants
reviewed in the literature rely for their estimation on data which are
available in limited local, typically American, circumstances but which may
not be obtained in an international survey. Examples are funds source
management and funds use management I'Haslam (1968)'1. Other variables
for which data are available and which are suggested in the literature are
capital and liquidity ratios, the loan/deposit ratio (in practice, the reciprocal
of the liquidity ratio), loan loss expenses and some overhead expenditures
[:Short (1979); Bell and Murphy (1969); Kwast and Rose (1982)].
External to the bank, several factors have been suggested as impacting on
profitability - regulation [Jordan (1972); Edwards (1977); Tucillo (1973)],
bank size and economies of scale ['Benston, Hanweck and Humphrey (1982);
Short (1979)1 competition [-Phillips (1964); Tschoegl (!982)], c_oncentration
[Rhoades (1977); Schuster (1984)'1, growth in market [Short (1979)], interest
rates as a proxy for capital scarcity [Short (1979)1 and government
ownership !'Short (1979)]. Finally in their exposition of the Galbraith-Caves
hypothesis, Edwards and Heggestad (1973) and Heggestad and Mingo (1976)
suggest that market power experienced by banking corporations may be
translated into risk avoidance by way of a 'low risk' loan portfolio rather
P. Bourke, Bank profitability 67

than by being reflected in higher profits. They suggest that a lower level of
service as measured in a variety of ways is detectable.

4. Design of the model

Testing of most of the variables described above as being represented in
the literature does not present major difficulties. Some aspects of the
literature, however, must be reviewed in some detail becaue of the differing
emphases that U.S. domestic studies must have, as compared to international

4.1. Regulation
In relation to regulation, for instance, there is an implied assumption that
within the U.S. the intensit/ of regulation is a constant; there may be a
prcsump~lt, n that regulation out~.~de the U.S. varies from country to country.
Accordingly, the literature has never adequately examined the consequences
of changes in the intensity of regulation. The empirical problems of doing so
are, however, daunting as regulation is not readily susceptible of comparative
measurement. I considered several approaches and the most promising was a
Delphi/Jury of Expert Opinion ranking of the intensivity of regulation on a
!imited scale. While it may be possible to locate experts who are familiar
enough with regulation in each of the sample countries to provide a
comparative ranking for a pa:ticular year, it proved impossible to do this in
a time series study extending over ten years.
Seminar participants have proposed that the severity of regulation may be
examined by constructing a matrix to investigate the presence or otherwise of
various restrictions in different countries - entry barriers, interest rate
restrictions, credit ceilings, et cetera. However, the direction of any of these
individual effects is unclear. For instance contestable market theory and
indeed regulation theory in general point to the importance of barriers to
entry in enhancing profitability while some of the other regulatory interven-
tions may depress profitability.
The issues of regulation, competitive behaviour and concentration are
related because as a referee of this journal has pointed out the source of the
correlation between profitability and concentration may be a correlation
between concentration ~.nd regulatory prntp.etic~n on banks and regulatory
protection and profitability. ! will return to the question of entry barriers
and related issues under the heading of Industry Structure but in the absence
of a clear theoretical model, a matrix or tabulation of various regulatory
interventions will assist us little in the attempt to measure the differential
effects of regulation across countries.
It has also been suggested that differences in the capital ratio could be
68 P. Bourke, ~a~k profitability

used as a proxy for regulation on ~he basis that the r~mrket would equalise
capital ratios for banks of the m~,gnitude and state, re of the banks in this
sample. However, this requires tMt market-derived cost of capital figures be
first obtained and excess costs of capital be computed for banks in each
country. Aliber (1984, p. 670) suggests the use of Q ratios in examining
changes in cost of capital for banks in different countries. (Q ratios relate the
market value of the firm to its bock value.) Goodman (1984, p. 685)
questions the conceptual appropriateness of the use of book value as a proxy
for replacement cost but, in any case, many of the banks included in this
survey are not publicly traded, usually because they are state owned, and no
market capitalisation figures exist.
Of greater immediate relevance are the expense preference theories of
Franklin Edwards (1974) who postulated that excess or supernormal profits
of regulated industries may be diverted away from net profit into sub-
optimal expenditure patterns related to management as oppposed to share-
holder preferenccs. There is also the possibility, relevant particularly in
countries where the banking industry is unionised, that the super-normal
earnings of firms in a regulated industry may be appropriated in the form of
payroll expenditure.

4.2. Industry structure

Studies of mar~'et structure for the banking industry within the United
States have a long history and in general the broad thrust of research work
has been that concentration is positively and moderately related to profitabi-
lity. Rhoades (1977) provides an extensive review of empirical work in this
area. However, more recent work casts doubts on the validity of these
findings and in particular, Gilbert (1984), in a critical review of the literature,
suggests that earlier studies were unable to take advantage of the
implications of the subsequent development of contestable market theory
[Baumol, Panzar and Willig (1982)] with its emphasis on entry restrictions.
He also summarises the evidence in favour of the proposition that the
correlation between concentration and profitability may reflect superior
efficiency among the larger firms rather than the use of market power - the
'differential efficiency' hypotheses. There is no direct evidence to date on this
effect in banking markets but Chappell and Cottle (1984) report an
experiment which has a bearing on the design of the present study. They
examined the relationship between the average price-cost margin for indus-
trial firms (sales less cost of materials less payroll expenses/sales) and
concentration in two settings. Firstly, when efficiency variables (in this case
related to efficient plant size) were included they found that the price cost
margin was positively related to concentration for the four largest firms but
no significant relationship was found for the smal!er firms. Secondly, wl~en
P. Bourke, Bank profitability 69

efficiency variables were included concentration is found to have an insignifi-

cant relationship to all firm sizes although interestingly the sign is negative.
Unfortunately the data required to support a similar study in the inter-
national banking sector is not available; however Chappell and Cottle's use
of the price-cost margin approximates to my 'value-added' variables (see
below). An industrial study by Peltzman (i97.7) also found a significant
negative correlation between changes in concentration aad ,nit costs for
industrial firms. In his conclusion Peltzman notes that his findings are
'consistent with an eclectic view but one in which efficiency effects
Smirlock (1985) takes this discussion a little further in the banking context
in that he examines the effect of market shares and concentration on
profitability and finds that market share rather than concentration has a
significant and positive impact. SmirlocK raises an important ca'~eat about
his work. His research is confined to limited branching states (Colorado,
Kansas, Missouri, Nebraska, New Mexico, Oklahoma and Wyoming) and
the extension of his approach to branching states (and obviously countries)
may not be appropriate. ! believe that this caveat may be related to
differences in the nature of barriers to e n t r y - regulatory in limited branching
states but commercial and regulatory in other states. In any case the absence
of market share data for banks not included in my study makes Smirlock's
approach unfeasible at this time.
On the other hand Rhoades and Rutz (1981) have shown a significant
negative relationship between concentration and firm rank stability (which is
itself a proxy for competitive behaviour) for U.S. banking markets. They also
found no significant relationship between concentration and market share in
these markets.
An interesting study by Hannah and McDowell (1984) relates the rate of
diffusion of automatic teller machines (ATMs) to several independent
variables including concentration. Having controlled ior factors such as wage
costs, they found that the rate of diffusion was positively related to
concentration. These findings are difficult to interpret in the context of the
industrial organisation literature in the sense that ATM diffusion might be
regarded as competitive behaviour and accordingly the expected relationship
with concentration should be negative. It is likely, however, that the findings
are more in keeping with ~he 'differential efficiency' hypothesis in so far as
dominant firms may have attained that position by continually investing in
cost saving equipment.
I have already raised the topic of barriers to entry in relation to the
measurement of the effects of regulation and it must also be considered
under the heading of market structure as Gilbert (1984) has pointed out.
Contestable markets theory holds that the adverse welfare consequences of
conce~tratic~l (if any) may be ameliorated if barriers to entry are not present.
70 P. Bourke, Bank profitability

Two questions arise. What is the extent of regulatory barriers to entry? Does
the existence of concentration in itself constitute an effective barrier, particu-
larly in retail markets?
Looking firstly at the question of the existence of regulatory barriers,
paradoxically these barriers when they exist may well be more apparent than
real. For instance, while many countries in this survey maintained formal
entry barriers, particularly in relation to foreign banks, almost all countries
had ~xperienced a growth of potential competitors to traditionally organised
banks - b~,2-:,,~ ~ocleties in Britain, Ireland and Australia, Trustee Savings
Banks in i'.'ew Zealand, thrifts in the. United States, et cetera. Additionally,
there are very few examples of completely new entrants to banking markets
attempting to compete in the retail sector and in fact examples are scarce of
any form of retail activity transferring successfully across international
frontiers in recent years. [See Tschoegl (1987) for a comprehensive discussion
of the factors affecting foreign direct investment in retail banking. He
suggests that regulatory constraints are only one of many factors.]
Baer and Mote (1985) present evidence that concentration is higher
internationally than in the United States and within the United States is
higher in branching than in non-branching states. They also make the
important point that studies of market structure must adequately define the
relevant market which in the banking context includes non-bank financial
intermediaries. Their approach to market definition is similar to that adopted
in my work.
International evidence in the literature is also scant in relation to the
question of whether concentrated m~rkets themselves constitute a barrier to
entry. Ball and Tschoegl (1982, p. 417) suggest that concentrated markets
may offer a price umbrella under which new, fringe entrants may shelter, but
offer no empirical evidence.
Spiller and Favaro (1984) -'resent evidence from Uruguay of changes in
competitive behaviour among dominant banks when barriers to entry were
lowered and local non-bank financial intermediaries were allowed to enter
the market.
In summary, the present state of the literature offers little clearcut
guidance in relation tt~ the role of concentration in bank profitability
determination - in some ins~,,,nces data unavailability makes the testing of
some promising concepts impossible for international markets.

4.3. Risk avoidance

The Edwards-Heggestad (1973) and Heggestad-Mingo (1976) variant of
the Galbraith-Caves hypothesis EGaibraith (1967)1, as noted above, submits
that market leaders in concentrated industries take a significant portion of
th,: potential profits latent in their position of market power in the f o ~ of
P. Bourke, Bank profitability 71

avoiding uncertainty. In the case of banking this avoidance of uncertainty

largely takes the form of a reduced tisk profile on its loan book.

4.4. Value-added measures

Another general area which a successful model must encompass is the
problem of the variability in accounting standards and reporting which may
exist between various countries. The steps taken in the data collection
process to deal with these general problems have already been discussed but
the ability to use the loan loss account as a means of building hidden
reserves is common throughout all banking systems.
As a step towards dealing with this general problem, I suggest the concept
of 'value added' as part of the solution process. Two variants on this
approach are used. In industrial terms, value added is usually *aken to mean
the difference between selling price and all bought-in inputs excluding labour.
In banking terms, value added would be strictly defined as loan interest and
other revenue less deposit interest and other non-wage expenses. In the light
of international data problems, I believe that the foi~wing two measures of
value added used are a reasonable proxy.
Firstly, net income before tax + staff expenses is used to test the expense
preference theory on the basi,s that this measure of value added largely
removes the possibility of eith,,-r managerially induced expenditure or labour
union-negotiated wage demands appropriating excessive proportions of net
income and allows the relationship between concentration and other inde-
rendent variables and this dependent variable to be estimated.
Secondly, net income before tax + staff expenses + loan losses is a proxy for
gross margin which is frequently unavailable on an international basis and
allows the determinants of gross profit to be tested. Additionally, by
observing the relationships between net income before tax +staff expenses
+loan losses and concentration, comment may be made on the possible
operation of the Edwards-Heggestad-Mingo effect.

4.5. Economies of scale

The literature is reasonably clear that larger banks (across a broad range
of magnitudes for domestic U.S. banks) do not experience economies of scale
[Benston, Hanweck and Humphrey (1982)]. Short (1979) tested for this
variable but obtained no significant results. Tschoegl (1983) a13o confirms
this result for the 100 largest banks in the world from 1969 to 1977.
Accordingly, it is not proposed to test for economies of scale.

4.6. Summary of data and independent variables

The data is a pooled t,.'~ne series cross-section. Where parent banks and
72 P. Bourke, Bank. profitability

subsidiaries are both included in the data, the unconsolidated results from
the parent are used.
I tested the relationship betw~n profitability as defined in the several ways
described below and the following independent variables:

- Staff expenses, both in their own right and as a proxy for overhead
expenses generally, whose reliability in the data was not felt to be adequate.
- Capital ratios, i.e. capital including reserves as a percentage of total
Liquidity ratio, i.e. the ratio of liquid assets to total assets. The

reciprocal of this ratio can also be used as a proxy for the loan/deposit ratio.
Concentration ratio. The three bank concentration ratio is used, the

concentration basis being taken as the share of largest three banks of

either total deposits or assets, depending on data availability. Data avail-
ability also made impracticable the use of the Herfindahl ratio even in its
truncated form. [See Rhoades (1977) for a review of the relative merits of
both the three bank concentration ratio and the Herfindahl Index.] The
market share of either deposits or total assets in a particular country is
determined by the sum of deposits or total assets of the top three banks (as
obtained from their published financial statements) as a ratio of the deposits
or total assets of the banking system including non-bank financial inter-
mediaries, such as thrifts, buidling societies, et cetera (obtained from the
Annual Reports of Central Banks for each country). The assumption inherent
in this methodology is that the top three banks in each country have
approximately the same proportion of foreign business in their portfolios
which, given that the largest banks in each country are well known
international banks, may not be an unreasonable assumption. This assump-
tion was also made by Short (1979) in his classic study already cited. The
extent to which total assets or deposits of the banking system provide an
adequate market definition is also an issue, given the ability of corporate
customers to source their financial requirements on a geographically disperse
basis. I suggest that this problem is less severe in an international study as
opposed to domestic U.S. research because the presence of exchange risk
must operate to provide a less porous market than would be the case in
relation to the SSMA markets normally used in U.S. work. In relation to my
research, however, the potential criticism remains valid in relation to
California, New York and Massachusetts.
- Government ownership. Short (1979) had found that the government
ownership of banks is correlated inversely with profitability and, accordingly,
a dummy variable representing the ownership status of each bank is
- Interest rates. Shor,~ had found a positive relationship between nominal
interest rates and return on capital, interest rates b~ing used as a proxy for
P. Bourke, Bank l~rojJtGbility 73

capital scarcity although it may have been more appropriate to use real
interest rates. It is possible that interest rates have a direct influence on
profitability and this will be tested in the context of return on assets as the
dependent variable.
- Market growth. The use of market growth as a variable is not
suggested extensively in the literature. However, Short found that asset
growth in individual banks was not significant - he had used it to control for
banks' managements who were growth, as opposed to profit, maximisers. It
is suggested that growth in total market may be considered as a potential
variable in the sense that an expanding market, particularly if associated with
entry barriers, should produce the capability of earning increased profits.
Accordingly, annual growth in money supply in each country is suggested as
an independent variable.
- Inflation. Revell (1979) has suggested that inflation may be a factor in
the causation of variations in baek profitability although this is not widely
discussed in the literature elsewhere. Its effect depends on the assumption
that wages and other non-interest costs are growing faster than the rate of
inflation, which is not unusual and, accordingly, the annual growth in the
consumer price index in each country is used as an independent variable.

4.7. Dependent variables

The following general categories of dependent variables were used.

(a) Return on capital. Net income before and after tax as a ratio of total
capital including all reserves. The ratio of after-tax profits to capital was
used by Short (1979). A further variable is defined as the ratio of net
income before tax to capital+total borrowings (as a proxy for sub-
ordinated loan stock which is used in substitution for equity capital).
(b) Return on assets. Net income before tax as a ratio of total assets.
(c) Value added return on total assets.
(0 The ratio of net income before taxes+staff expenses to total assets.
(i0The ratio of net income before taxes+staff expenses + loan losses to
total assets.

4.8. Functionalform of the eguation

The literature generally, in so far as it is discussed, comes to, the
conclusion that the appropriate functional form for testing is a linear
function although there are dissenting opinions. Short (1979) investigated this
question and concluded that 'linear functions produced as good results as
74 P. Bourke, Bank profitability

any other functional form'. The Davidson, Godfrey, MacKinnon (1985)

specification test was also applied with results that supported the use of the
linear function. Accordingly, it is proposed to test using a linear function of
the form:

y = c + a t x t +azx2 +aaxa,...,anxn,

where y is the dependent variable, c is the constant term, and x~ to x. are

the independent variables as described above.
The White (1980) heteroskedasticity test (a variant of which is available on
the Shazam econometric package) confirmed the absence of hetero-
skedasticity problems in the international data. In addition, there is no
evidence of any intertemporal error correlation structure nor of any signifi-
cant difference in the intercept terms by year or by country. [For an
interesting discussion of some related econometric issues in a study of
international iocation decisions of U.S. banks, see Nigh, Cho and Krishnan

4.9. Variable names

The variable names are as follows:

4.9.1. Dependent variables

(NPBT = Net profit before tax; NPAT = Net profit after tax).
BTCR NPBT as % of capital and reserves,
ATCR NPAT as % of capital and reserves,
BTCRTB : NPBT as/o o / o f c:pital and reserves + total borrowings,
BTTA NPBT as % of total assets,
BTSETA , NPBT + staff expenses as % of total assets,
BTSEPLTA : NPAT + staff expenses + provision for loan losses as % of total

4.9.2. Independent variables

GO VT : A dummy variable :epresenting government ownership, 1 -
when a bank is owned by a government, national or provin-
cial; zero - otherwise,
CONC : Three bank concentration ratio,
INT : The long-t¢,'m bond rate for each country for each year (IMF),
MON :Growth in money supply for each country for each year
CRTA : Capital and reserves as % of total assets,
CBINVTA :Cash and bank deposits+investment securities as % of total
P. Bourke, Bank profitabilif y 75

Table 1
Estimates of the relation between return on capital a n d selected independent


(I) BTCR =-0.03 0.71 b 0.1 0.3 b 0.1
(2) BTCR =-0.1 0.15 b - - 0.06
(3) BTCR =-0~09 0.17 b - 0.3 b 0.1
(4) ATCR =-0.27 0.04 b 0.1 - 0.01
(5) BTCRTB "--0.6 0.05 n - 0.25 b 0.04
(6) BTCRTB =-0.6 0,03 0.07 - 0.003
" N u m b e r of observations for each equation: 116.
bSignificant at 5% level - t statistics omitted for reasons of space. Constants

CPI • Percentage increase in consumer price index for each country

for each year (IMF),
SE • Staff expenses as % of total assets•

5. Resuhs
Findings are reported in tables 1 and 2.
Table 1 replicates Short's work to a greater or lesser extent depending on
the particular equation examined•
However, eq. (4) in table 1 is the exact equivalent of Short's sixth equation
(1979) which he expressed as follows (using the variable names in table 1):

ATCR=2.04-2.36GOVT~+O.O3CONC'+O.6INT" R 2 =0.52,

aSignificant at 5% level•
The almost total lack of correspondence between the present results and
those of Short are surprising and are difficult to explain. However, the
following comments may contribute to an understanding of the differences.
In addition to the inherent data collection problems of the present work
which have been described, Short faced further difficulties:
(a) Short's profit data related to a three year average rather thaa to the ten
year time span of the present work. However, eqs. (!)--(5) were re-
estimated on a year by year basis for years 1981, 1979, 1976 and 1973
with results in line with those of the time series with equally poor
explanatory power. Additionally, the effects of Short's averaging of profit
returns would be to reduce the variability in report profit figures a~Jd
thereby presumably provide more si~,~cai, t regression result: than in
76 P. Bourke, Bank profitability

(b) The data sources used were secondary, e.g almanacs as opposed to bank
financiai statements.
(c) While a greater number of countries are included, the number of banks
from each country in the sample was small. For instance, Belgium is
represented by two banks as opposed to eight banks in the present work.
More importantly, only five banking markets are common to both
(Belgium, Canada, Denmark, England and Wales and Holland) and
some important markets are present in ShoWs sample but not in mine
(France, Germany, Italy, Japan and Switzerland) and vice versa
(California, Massachusetts and New York). I understand from Dr. Short
that removing the above five countries (France, Germany, et cetera) frcm
,his sample substantially increases the mean and reduces the standard
deviation of his H values which may help to explain my lower R 2 adj.
figures in table !~
(d) ~veral countries are included in ShoWs sample where financial state-
ment information is notoriously unreliable, e.g. Germany, Italy and
Switzerland, while several of the U.K. banks enjoyed and practised the
privilege of hidden reserves. Of ShoWs sample of 60 banks, 21 banks are
subject to these problems.
The results sho~n in table 2 all relate to a~set (as opposed to capital)
based returns and, in general, show capital ratios, liquidity ratios and interest
rates as being positively related to profitability. The finding in relation to
capital ratios ,~s to be expected as, in accounting terms, capital represents a
'free' resource and Revell (1980) had noted an inverse relationship between
capital ratios and costs of intermediation. It is also possible to speculate that
well capitalised banks enjoy access to cheaper (because less risky) sources of
funds or that the prudence implied by high capital ratios is maintained in the
loan portfolio with consequent improvement in profit rates. The results in
relation to liquidity ratios are less expected as conventional wisdom is that
liquidity holdings (particularly if imposed by government) represent an
~xpense to banks.
As was expected, staff exp.~nses show an inverse if weak correlation with
pre-tax return on z~sets.
The results in relation to concentration require some consideration. In line
with findings in other parts of the ~iterature, concentration is shown to be
moderateiy and positively related to pre-tax return on assets. However, when
used in equat_ions having one of the measures of value added as dependent
variable, the sign of the relationship change~ to an inverse relationship. It
had been postulated that if, for instance, support were to be shown for the
expense preference theories, the sign of the relationship would remain
positive and the relationsh,~p strengthen in the case of the dependent variable
BTSETA (net income before ~ax + staff expenses as ratio of total assets). The
P. Bourke, Bank profitability 77

D~ml,al,I I I


,ID ,ID JD J~ ~L


I I I I I i I I

i 8 i


78 P. Bourke, Baak peof~a~l~tF

change of the sign of the concentration variable implies that, as concen-

tration increases, staff expenses are squeezed. Support for this contention is
found in Heggestad and Mingo (1976) who found that higher levels of
concentration were associated with lower levels of service (and presumably
lower staffing costs).
In relation to the dopendent variable BTSEPLTA (net income before
tax + staff expenses + loan losses as ratio of total assets) a similar phenome-
non is evident as the sign of the CONC variable changes which carries the
implication, in addition to that observed in relation to the BTSETA/CONC
relationship, that higher levels of concentration arc associated with lower
loan loss cost~ An immediate connection to the Edwards-Heggestad finding
may be m a d e - they hypothesised that higher levels of concentration were
associated with lower levels of loan portfolio risk. Additionally, a Federal
Reserve Board study, cited by Almaffn Phillips (1964) found a slight but
significant tendency for the rates charged by a bank to decrease as its market
share inc,--cascd. Bearing in =-m'nd that the ,,'affable BTSELPTA is a
reasonably close proxy for gross margin, the present findings arc not in
contradiction with the results of the previous work.
Identical equations were estimated on a cross-sectional basis for the years
1981, 19"t9, 1976 and 1973 with little important differences in findings to
those reported in table 2.

6. C ~ ~
The findings of Short's study are not confirmed except in the most general
sense. The results are, however, in agreement with concentration and bank
profitability studies for the domestic U.S. market and support is found for
Me Edwards-Heggestad-Mingo hypothesis. No support is found for expense
preference expenditure theories.

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Banking 16, no. 4, part 2, Nov.
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Ball, Clifford A. and Adrian Tscboegl, 1982, The decision io establish a foreign bank branch or
subsidiary: An application of binary classification procedures, Journal of Financial and
Qualitative Analysis XVII, no. 3, Sept.
Baumol, William J., John C. Panzar and Robert D. Willir,, 1982, Contestable markets and the
theory of industrial structure (Harcourt Brace Jovanovich, New York).
Bell Frederick W. and Nell Mushy, 1969, Impact of market structure on the price of a
commercial banking service, The Review of Economics and Statistics, May.
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