Productivity, efficiency and competition of UK depository institutions.

In the thesis, a number of cost characteristics of the UK building society and retail banking sectors are estimated using econometric techniques. The cost characteristics considered broadly fall into the three areas of productivity, efficiency and competitiveness. The study was undertaken with the aim of considering both the magnitude and degree of change in these cost characteristics over time. This assessment is deemed to be important due to the wide-ranging changes in the regulatory, institutional and market environment of both these sectors. For reasons of structure and clarity, the thesis is divided into two parts. The first part of the thesis provides a broad discussion of the operating environment, the model specification, variable definition, the concept of efficiency, econometric techniques, previous literature and the form of the statistics used to measure the relevant economic characteristics. The second part of the thesis contains the empirical studies in which economic characteristics are estimated. Cost efficiency is measured for both the retail banking and building society sectors using differing model forms and distinct functional forms. Fixed effects panel data techniques are employed in both studies. Both model specification and functional forms are deemed to influence the estimates produced. It is discovered that both sectors experience a degree of cost efficiency dispersion. Measures of economies of scale and product mix are also estimated with positive economies of scale and constant returns to scale found in the retail bank and building society sectors, respectively. The findings from the analysis of economies of product mix are less than clear. Nevertheless, it may be stated that the re-regulation which allowed a greater degree of product diversification in the building society sector appears to be justified in terms of cost efficiency. Very low levels of technical change and total factor productivity growth are found for both sectors. The degree of competitiveness of the building society sector was assessed using a revenue function approach. The results suggest that both retail banks and building societies operate in markets characterised by a moderate degree of monopolistic competition.