Bank size, competition, and efficiency: a post-GFC assessment of Australia and New Zealand

Abstract

This paper investigates the impact of the global financial crisis (GFC) on banking market structure and efficiency in both countries, and the relationship of bank size and market competition with cost and profit efficiencies. Efficiencies of 11 Australian and New Zealand large commercial banks are estimated with a one-stage stochastic frontier approach (SFA) for the period 2003–2017. The Herfindahl- Hirschman Index (HHI) and Lerner index are used as proxies for market competition along with eight banking environment variables. Cost and profit efficiencies significantly declined during 2008 and 2009, but the impact of the GFC persisted longer in New Zealand than in Australia. The level of risk and competition has reduced, and bank size increased in the post-GFC period. Bank size is found to be positively associated with bank efficiency. Market competition negatively influenced cost and profit efficiencies during the study period, especially after the GFC.

KEYWORDS:

• Banking market structure
• global financial crisis
• bank efficiency
• market power
• market concentration

Acknowledgments

The authors would like to thank Santiago Carbo-Valverde, Erwin Diewert, John Duca, Mamiza Haq, Subal Kumbhakar, Dimitri Margaritis, Abul Shamsuddin, Michael Skully, Hung-Jen Wang, and attendees at the CEPA International Workshop on Performance Analysis (Brisbane), Western Economic Association – International (Newcastle), and North American Productivity Workshop (Miami) for comments on earlier versions of this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by Czech Science Foundation: [Grant Number 20 00178S].