Panzar-Rosse Model as a Tool to Test for Competition in the UK Firms - Dissertation Example

The results will provide details of the analysis and the conclusion will summarize the relevancies drawn from the application of the Panzar-Rosse model using the dataset identified in the data section. Visual models of the calculations using the Panzar-Rosse model will be presented in appendices. Panzar-Rosse Model as a Tool to Test for Competition in UK Firms Introduction The Panzar-Rosse model was initially crafted to analyze monopolizing criteria within the banking industry and is still a widely used model (1987).

Banking organizations use the equations developed within this model to calculate or determine the facilities of competing institutions to gain a clearer estimation of their own position within the industry (Lima & Pinho, 2010). The Panzar-Rosse model (H statistic) uses emphatic statistical analyses of the institution’s financial framework to present a comprehensive perspective of the bank’s operations through equivalent to statements that imitate their purported capabilities. This analysis will present a Literature Review, Theoretical Framework, and Data for analysis, Empirical Framework, state the Results and Conclusions drawn regarding the use of the Panzar-Rosse model as a tool to test for competition in UK firms and provide graphical analyses of the data in the form of appendices at the end of the review.

The purpose of this evaluation is to use the Panzar-Rosse theory to rationalize the current financial crises facing the banking industry and to determine the predictive capabilities of the model as a whole to try to circumvent future disasters. Literature Review The recent financial crisis and the failure of large financial institutions like the Lehman Brothers, Fannie Mae, and Freddie Mac has raised numerous questions regarding the stability and reliability of the worldwide financial. Additionally, the recent failure of seven of the 91 European banks that underwent stress tests has raised numerous concerns as to the stability of the financial markets in the UK (Seven, 2010).

The banks that failed the test include five Spanish banks, Diada, Espiga, Banca Civica, Unnim, and Cajasur, and two German banks, Hypo Real Estate and Greece's ATEbank (Seven, 2010). The failure of these banks indicates that they would not be able to withstand future economic shocks and, according to the Committee of European Banking Supervisors (CEBS), they would need additional funding estimated at a total of 3.5bn Euros (?3bn) of new capital to meet the standards required (Seven, 2010). Although the UK’s ‘big four’ banks, which are HSBC, Lloyds, Barclays, and Royal Bank of Scotland all passed the stress test with capital ratios between 6.3% and 8.5%, the overall test included banks from 21 countries, representing 65% of the assets for this region and, in addition to the seven banks that failed the test, 16 more had capital ratios between 5% and 6% (Smith. 2011). While typical market theories suggest competition is beneficial to commerce, theoretical studies regarding the increased level of banking competition suggest contradictory findings.

Studies suggest that increased competition is unhealthy for an individual bank because it diminishes the profit margins of smaller banks and encourages them to invest in risky securities to make up the profit differential (Smith, 1984), while the larger banks that enjoy monopolistic statuses bear moderate profit losses and are less risk-averse.