Size, growth and bank dynamics

Abstract

This paper investigates the size distribution of the whole population of Spanish commercial, savings and cooperative banks from a dynamic perspective over the 1970 2006 period. To investigate the evolution of the size distribution, we determine whether the data satisfies the Law of Proportionate Effect (LPE) using panel unit root tests. We find that the size-growth relationship is not stable over time but changes depending on the competitive environment of banks (liberalization, deregulation and integration). When Spanish banking was highly regulated, we find that smaller banks grew faster than their larger counterparts. In recent years, however, we find that larger banks grow at the same rate or faster than smaller banks, a result that lends towards LPE acceptance. Thus, our study corroborates the conditioned nature of the size-growth relationship and the size distribution of banks, as emphasized by recent studies for the US banking system. Results imply that the size distribution of Spanish banks will become more skewed in next years, and concentration will tend to increase