The implications of latent technology regimesfor competition and efficiency in banking

Banks continue to dier in many ways, for instance with respect to business models,growth strategies, or nancial health. Neglecting these dierences confuses ine-ciency with heterogeneity while sub-sample estimation prohibits eciency comparisonsacross dierent samples. We use a latent class stochastic frontier model toestimate simultaneously multiple technology regimes and group membership probabilities.The latter are conditioned on six bank traits of German banks and weidentify four signicantly dierent technology regimes. Only small, retail focusedbanks exhibit cost ineciencies, which are 5.4% on average and thus substantiallylower compared to previous studies. We use technology regime specic cost parametersto measure competition with Lerner indices. Large, national universal banksand the smallest, most specialized banks exhibit the lowest level of competition. Inturn, medium sized universal banks are both ecient and exhibit the lowest Lernermargins between 1994 and 2004.[...]