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Appendix: Simplified Panzar-Rosse Model
Department of Economics, George Washington University. This paper was part of the author’s internship project in the European Department of the International Monetary Fund. The author is deeply indebted to Thomas Harjes for invaluable advice and guidance. The author is also extremely grateful for comments from Stijn Claessens, Gianni De Nicolo, Jorg Decressin, Alessandro Giustiniani, Daniel Hardy, Luc Laeven, Eliza Lis, Roberto Samaniego, Jerome Vacher and participants at EUR seminar and GWU seminar. All errors are the author’s.
For more details on the PR model, please refer to the appendix.
PR assume demand elasticity is larger than 1.
Bikker and Groeneveld (2000), De Bandt and Davis (2000) and Bikker (2004) estimate H-statistics recursively over time. A possible complication of such an approach is that H-Statistics are only valid under the assumption that markets are in long-run equilibrium which could be at odds with frequent variations in the level of competition.
Due to the limited observations for some countries, the fixed effect panel estimation could be inefficient (the average number of observations for each bank is very low, e.g. in some cases less than 2, especially when the full sample is split into sub-samples. And the Hausman test rejects fixed effects in these cases.). To be consistent in the full sample and sub-sample analysis, OLS is preferred.
Equilibrium test results are not reported, but are available upon request.
The euro area countries in the sample include members since the start in 1999: Austria, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal and Spain, and Greece which joined in 2001.
We need to be aware that accounting differences across countries (especially with the U.S.) and over time may affect the comparability of the accounting data. For example, the Continental model focuses on debt holders, while the Anglo-Saxon model favors share holders, which may leads to different emphases on losses/costs or gains in their statements and therefore possible distortions of the comparisons of H-statistics which are based on factor cost elasticities. Although variables are normalized with total assets, and the effects of accounting differences on H-statistics are not specifically estimated in this paper, conclusions should be drawn with caution.
EMU started in 1999 but the euro entered circulation only in 2002. Estimation results are robust if the sample is split in 1999, or 2000.
This paper delete branches of euro banks in other euro countries in the estimations for euro area aggregate to avoid double counting. For example, Deutsche is treated as one German bank, notwithstanding it having major business abroad. Since consolidated accounts are used if available, this recollection method is reasonable and less complicated given the data.
The standard deviation of H-statistics of euro member countries drops from 0.17 before EMU to 0.12 after EMU.
The t-test is not reported, but can be easily computed.