The relationship between charter value and bank market concentration: the influence of regulations and institutions

This article analyses the influence of regulations and institutions on the relationship between market concentration and bank charter value by applying a simultaneous equations model to a sample of 276 banks in 27 countries. Results highlight that the role of the structure-conduct-performance (SCP) and the efficient-structure (EFS) hypotheses in explaining a positive relationship between bank charter value and market concentration depends on a country's regulatory and institutional set-up. The validity of EFS forecasts compared to SCP forecasts increases in line with the quality of the legal environment and enforceability of contracts, with the increased weight of the markets compared to banks and with the share of banking assets held by banks that are majority-owned by foreign owners and by the government. In contrast, tighter legal restrictions on the activities banks are allowed to pursue limit the validity of both the EFS and SCP hypotheses.