Market Structure and Performance in Australian Banking

The paper uses annual and pooled data on Australian banks for the years 1994 to 1996 to test the two competing hypotheses of market structure and performance; namely, the structure-conduct-performance hypothesis (in concentrated markets firms derive higher profits due to collusion) and the efficiency hypothesis (firms derive higher profits because they are efficient). We test these two and other two intervening hypothesis in the context of the Australian banking market. The results reject the efficiency hypothesis and also the two intermediate hypotheses but there is a lack of strong evidence to reject the structure-conduct-performance hypothesis. The results are important because such an empirical investigation has not been conducted in Australia to date. The results suggest that it may be hard to defend abolishing the Four-pillar Policy (which was a major recommendation of Wallis Report 1997) on efficiency grounds.