The Profit-Structure Relationship and Mergers in the European Banking Industry: An Empirical Assessment

Empirical research provides evidence of a relationship between market structure and profitability in the European banking sector. This paper tests several market-power and efficient-structure theories, which might explain the profitstructure relationship. These tests reveal that X-efficiency is the crucial factor underlying the profit-structure relationship because it enables banks to improve both profitability and market share. Bank mergers in recent years appear to have been successful because, on average, X-efficiency and profitability have improved after the consolidation. Moreover, there are no indications of unfavourable price setting behaviour as a result of increased market power. (JEL G14, G21, G34, L11