Competition in the banking industry : Analyzing Market power, Competitive dynamics and Monopolistic behavior using Panzar-rosse statistical model

Abstract

This research examines market structure and study the relationship between competition, market power and financial stability In the UK banking industry sector over the period of 2005 to 2023. Comprehensive panel dataset of 179 banks with 1254 observations have been used to employ structural (HHI) and non-structural approaches (Panzar-Rosse H-statistic, Boone indicator and Lerner index) empirically.

Computed results shows that Herfindahl-Hirschman Index with mean of 0.06 indicating competitive environment, Lerner index around 0.998, Boone indicator also around -1.64, and Panzar-Rosse H-statistics around 0.399 to relate them with banks size z-score with median of 5.03. Fixed effects regressions and pairwise correlations matrix analysis indicates weak association between competition and financial stability as well as inverse relationship between the competition and stability indicators in addition to the low collinearity.

As a support, the Boone regression has confirmed that the environment in the UK banking industry is competitive due to the significant level of efficiency on cost allocation, while HHI trends highlight unconcentrated banking industry in the UK post-crisis as a result of enhanced regulatory implementations.

In Summary, Results indicates monopolistic-competition behavior with moderate market power and, risk of default consistent with the competition-fragility trade of