Efficiency Structure Hypothesis versus Structure-Conduct-Performance Hypothesis Revisited

Author Name TSUTSUI Yoshiro  (Faculty Fellow, RIETI / Professor, Osaka University) /SATAKE Mitsuhiko  (Professor, Ryukoku University) /UCHIDA Hirofumi  (Associate Professor, Wakayama University)
Creation Date/NO. January 2006 06-J-001
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This paper examines whether the efficiency structure hypothesis holds true for major Japanese commercial banks using panel data covering fiscal years 1974-2001. The efficiency structure hypothesis has been hitherto mostly examined in comparison with the structure-conduct-performance (SCP) hypothesis in the framework that determines which of the two measurements - the degree of market concentration or market shares - better explains market performance such as profits and interest rates. In this paper, we point out problems of this framework and examine the efficiency structure hypothesis in a more straightforward way by focusing on the proposition that the more efficient a bank is the more it grows. Also, the paper provides analysis of the SCP hypothesis that is formulated as follows: the more a bank grows, the more inefficient it becomes. Specifically, we estimate organizational inefficiencies and the diseconomy of scale for each major bank using the panel data. Then we examine how these estimates affect the bank's size in the next year, and in reverse how they are affected by the growth of the bank. The estimation results show: (1) the efficiency structure hypothesis is supported by the organizational efficiency, but not by the diseconomy of scale; and (2) the SCP hypothesis is not necessarily supported.