The future of small banks in the new competitive environment: the case of the Italian banking industry

Abstract

Over the past few years, a debate has been developed about the validity of the present 'small bank developing model', whose future is threatened under the pressures of financial market' globalisation, of European unification, and of the restructuring process which has emphasised 'size' as a competitive strategy. The main aim of this study is to attempt to contribute to this debate by providing some theoretical and empirical insights into the Italian Banking System. In particular, it devotes attention to a sample of all sizes of more than 1,100 Italian banks over the period 1987-1997, focusing specifically on the small bank sector, the study of which in the past had been largely hampered by a lack of suitable data. Overall, the study is divided into three parts. The first part provides a descriptive analysis of the new competitive environment and a theoretical study on the role and the rationale of small banks. The second part is dedicated to estimate several measures of bank' performance: the traditional financial ratio analysis provides a useful background on the IBS, showing an adequate level of competitive power of small banks; these results are also confirmed by the production efficiency analysis, based on a Fourier-Flexible cost function, with reference to scale economies, X-efficiency and for the first time on the technical change indicators. Finally, in order to investigate the determinants of banking profitability, the third part firstly applied the methodology suggested by Berger (1995) and developed by Berger and Hannan (1997) to describe the Profit-Structure relationship in banking; after, it investigated other possible internal and external determinants of smaller banks' performance, including for the first time some specific environmental factors. Overall, the theoretical and empirical findings of this research show that the present model of development of small banks remains apparently relevant and vital, and that small banks still have a competitive advantage in some key areas over larger banks.

Date of Award	May 2001
Original language	English
Awarding Institution	University of Wales, Bangor
Supervisor	Edward Gardener (Supervisor)