Competition, contestability and market structure in European banking sectors on the eve of EMU q Olivier De Bandt a, * , E. Philip Davis b,c,d,e a Banque of France, Research Department, 41-1376 SEMEF, 39 rue Croix des Petits Champs, 75049 Paris Cedex 01, France b Bank of England, Financial Stability Wing, London, UK c London School of Economics Financial Markets Group, London, UK d Royal Institute of International Aairs, London, UK e Pensions Institute at Birbeck College, London, UK Abstract In order to assess the eect of EMU on market conditions for banks based in countries which adopt the Single Currency, we use the H indicator suggested by Panzar and Rosse (Panzar, J.C., Rosse, J.N., 1987. Journal of Industrial Economics 35, 443± 456). Our contribution is to assess results separately for large and small banks, and for interest income and total income as a dependent variable. From a panel of banks over the period 1992±1996, we provide evidence that the behavior of large banks was not fully competitive as compared to the US. Regarding small banks, the level of compe- Journal of Banking & Finance 24 (2000) 1045±1066 www.elsevier.com/locate/econbase q Most of the paper was written when both authors were on secondment to the European Central Bank (ECB). Views expressed are those of the authors and not necessarily those of the ECB, the Bank of England or the Banque de France. They thank Salvatore Marrocco for excellent research assistance. They are also grateful to Ignazio Angeloni, Ted Gardener, Phil Molyneux, Philippe Moutot and Patrick Sevestre, as well as seminar participants in Bangor, Rome (Tor Vergata), at the Bank of England and the ECB for constructive remarks. The comments of an anonymous referee helped improve the paper substantially. * Corresponding author. Tel.: +33-1-42926531; fax: +33-1-42922766. E-mail address: odebandt@banque-france.fr (O. De Bandt). 0378-4266/00/$ - see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 1 1 7 - X