# Presentation: 466185

## Discussion ofBANK MARKET STRUCTURE, COMPETITION, AND SME FINANCING RELATIONSHIPS IN EUROPEAN REGIONS

**by**
**Mercieca, Schaeck, and Wolfe**
**Discussion by**
**Allen N. Berger****Board of Governors of the Federal Reserve System**
**	****Wharton Financial Institutions Center**
**The opinions expressed do not necessarily reflect those of the Federal Reserve Board or its staff.  **

## OUTLINE

**Brief summary of the paper.**
**Strengths and contributions of the paper.**
**Constructive criticism and suggestions for improvement.**

## BRIEF SUMMARY

**Authors regress variable measuring multiple lending relationships on measures of concentration, competition, and control variables.**
**Dependent variable takes on 3 values.**
**0 for no lending relationship, 1 for one lending relationship, 2 for multiple lending relationships.**
**Follow recent literature that views concentration as  a poor proxy for competition and allows for the possibility that concentration and competition describe two different characteristics of banking systems.**
**Use standard HHI to measure concentration (also try CR3).**
**Use Panzar-Rosse H-statistic to measure competition.**
**Include many controls for other characteristics of the local banking market, region, business environment, legal environment, the firm, the lending banks, etc.**

## BRIEF SUMMARY (2)

**Apply several versions of the model to data on three European regions:**
**Emilia-Romagna in Italy, Bavaria in southern Germany, and the southeast of England.**
**Based on questionnaires sent to SMEs in the three regions.**
**Italian SMEs have by far the most relationships, UK SMEs have by far the least.**
**71.4% have multiple relationships in Italy.**
**24.6% have multiple relationships in Germany.**
**2.8% have multiple relationships in the UK.**
**Strongly suggests that something about the banking culture in these countries drives the results.**
**Seems too large to be driven primarily by differences in HHI and H-Statistic.**

## BRIEF SUMMARY (3)

**Results suggest that concentration and competition have opposing results.**
**HHI has negative effect.**
**H-Statistic has positive effect.**
**Results suggest that concentration not a good measure of competition, consistent with recent research.**
**Results are robust to a number of different changes in specification.**
**The authors offer some plausible explanations for the results.**
**Negative effect of concentration – firms have fewer choices of banks.**
**Positive effect of competition – consistent with market power hypothesis.**

## STRONG POINTS OF THE PAPER

**The authors bring a new data set to bear on issues of SME credit availability.**
**Questionnaire for SMEs is very comprehensive.**
**Likely opens the door for much more future research on SME financing.**
**I would like to see more discussion of the questionnaire.**

## STRONG POINTS (2)

**The authors address important questions that are not resolved in the literature.**
**What explains the tremendous differences in multiple banking across European nations that are supposed to be part of a single market?**
**What are the effects of concentration and competition on the number of banking relationships for SMEs?**
**Is concentration a good measure of competition?**
**Do other banking market characteristics significantly affect the number of lending relationships?**

## STRONG POINTS (3)

**The authors run many robustness checks and get very consistent results.**
**Concentration has a robust negative effect on multiple banking relationships and competition has a robust positive effect.**
**Other characteristics of the local banking market have important effects on the number of lending relationships.**

## SUGGESTIONS FOR IMPROVEMENT

**It appears that the key exogenous variables, HHI and H-Statistic, take on only 3 values, one per nation. **
**This calls into question the main results about the effects of these variables.**
**As discussed earlier, there are tremendous differences across the three countries in the dependent variable, multiple lending relationships, that suggest some large differences in the way banking is done across countries.**
**Multiple lending relationships is 71.4% in Italy vs. 2.8% in UK, too much to be explained by HHI and H-Statistic. **
**The differences in banking culture may be inappropriately attributed to HHI or H-Statistic if they are not otherwise controlled for in the regressions.**
**It is hard to believe that the authors can measure the effects of concentration and competition with any precision using only 3 values of each.**

## SUGGESTIONS (2)

**Not much that the authors can do about their data set.**
**I suggest that the authors try to dig deeper to control for the reason or reasons for these very large differences across nations.**
**Look at the literature on multiple banking in these countries for alternative explanations.**
**E.g., see Detragiache, Garella, and Guiso JF 2000 for discussion of why Italy has such a high incidence of multiple banking. **
**Look at other literature on the associations among measures of concentration, competition, and multiple banking.**
**E.g., see Virginia Tirri’s paper on Italian banking on SSRN.**

## SUGGESTIONS (3)

**Clarify or change the estimation procedure.**
**Unclear what the regression method is.**
**Authors say they use Tobit, which does not seem appropriate for a dependent variable with just 3 discrete values.**
**0 for no lending relationship, 1 for one lending relationship, 2 for multiple lending relationships. **
**I would recommend ordered logit.**

## SUGGESTIONS (4)

**Problems with the H-Statistic.**
**Unclear how it is calculated.  Appendix says banks are split between large and small banks, so I was expecting 2 statistics, one for large banks, one for small banks.**
**What value goes in the regressions, an average of the two?**** **
**Use of H-Statistic is only appropriate if markets are in long-run equilibrium.**
**Does not seem likely, given that the authors are discussing a situation of rapid consolidation and increases in competition, transition to the Euro, etc.**
**I suggest trying the Lerner index, measures of foreign entry, or other measures of competition.**

## SUGGESTIONS (5)

**Try different measures of multiple banking relationships.**
**Unclear why the authors mix in the zero lending relationships with single versus multiple.**
**They seem to be mixing the decision whether to borrow with whether to borrow from multiple banks.**
**These are very different decisions with different determinants.**
**Try two alternative measures.**
**1. Single versus multiple lending relationships.**
**2. Single versus multiple banking relationships of any type (including having a deposit account).**
**This is the standard definition of multiple banking.**