by Mercieca, Schaeck, and Wolfe Discussion by

1. Discussion ofBANK MARKET STRUCTURE, COMPETITION, AND SME FINANCING RELATIONSHIPS IN EUROPEAN REGIONS by Mercieca, Schaeck, and Wolfe Discussion by Allen N. BergerBoard of Governors of the Federal Reserve System Wharton Financial Institutions Center The opinions expressed do not necessarily reflect those of the Federal Reserve Board or its staff.

2. OUTLINE • Brief summary of the paper. • Strengths and contributions of the paper. • Constructive criticism and suggestions for improvement.

3. BRIEF SUMMARY • Authors regress variable measuring multiple lending relationships on measures of concentration, competition, and control variables. • Dependent variable takes on 3 values. • 0 for no lending relationship, 1 for one lending relationship, 2 for multiple lending relationships. • Follow recent literature that views concentration as a poor proxy for competition and allows for the possibility that concentration and competition describe two different characteristics of banking systems. • Use standard HHI to measure concentration (also try CR3). • Use Panzar-Rosse H-statistic to measure competition. • Include many controls for other characteristics of the local banking market, region, business environment, legal environment, the firm, the lending banks, etc.

4. BRIEF SUMMARY (2) • Apply several versions of the model to data on three European regions: • Emilia-Romagna in Italy, Bavaria in southern Germany, and the southeast of England. • Based on questionnaires sent to SMEs in the three regions. • Italian SMEs have by far the most relationships, UK SMEs have by far the least. • 71.4% have multiple relationships in Italy. • 24.6% have multiple relationships in Germany. • 2.8% have multiple relationships in the UK. • Strongly suggests that something about the banking culture in these countries drives the results. • Seems too large to be driven primarily by differences in HHI and H-Statistic.

5. BRIEF SUMMARY (3) • Results suggest that concentration and competition have opposing results. • HHI has negative effect. • H-Statistic has positive effect. • Results suggest that concentration not a good measure of competition, consistent with recent research. • Results are robust to a number of different changes in specification. • The authors offer some plausible explanations for the results. • Negative effect of concentration – firms have fewer choices of banks. • Positive effect of competition – consistent with market power hypothesis.

6. STRONG POINTS OF THE PAPER • The authors bring a new data set to bear on issues of SME credit availability. • Questionnaire for SMEs is very comprehensive. • Likely opens the door for much more future research on SME financing. • I would like to see more discussion of the questionnaire.

7. STRONG POINTS (2) • The authors address important questions that are not resolved in the literature. • What explains the tremendous differences in multiple banking across European nations that are supposed to be part of a single market? • What are the effects of concentration and competition on the number of banking relationships for SMEs? • Is concentration a good measure of competition? • Do other banking market characteristics significantly affect the number of lending relationships?

8. STRONG POINTS (3) • The authors run many robustness checks and get very consistent results. • Concentration has a robust negative effect on multiple banking relationships and competition has a robust positive effect. • Other characteristics of the local banking market have important effects on the number of lending relationships.

9. SUGGESTIONS FOR IMPROVEMENT • It appears that the key exogenous variables, HHI and H-Statistic, take on only 3 values, one per nation. • This calls into question the main results about the effects of these variables. • As discussed earlier, there are tremendous differences across the three countries in the dependent variable, multiple lending relationships, that suggest some large differences in the way banking is done across countries. • Multiple lending relationships is 71.4% in Italy vs. 2.8% in UK, too much to be explained by HHI and H-Statistic. • The differences in banking culture may be inappropriately attributed to HHI or H-Statistic if they are not otherwise controlled for in the regressions. • It is hard to believe that the authors can measure the effects of concentration and competition with any precision using only 3 values of each.

10. SUGGESTIONS (2) • Not much that the authors can do about their data set. • I suggest that the authors try to dig deeper to control for the reason or reasons for these very large differences across nations. • Look at the literature on multiple banking in these countries for alternative explanations. • E.g., see Detragiache, Garella, and Guiso JF 2000 for discussion of why Italy has such a high incidence of multiple banking. • Look at other literature on the associations among measures of concentration, competition, and multiple banking. • E.g., see Virginia Tirri’s paper on Italian banking on SSRN.

11. SUGGESTIONS (3) • Clarify or change the estimation procedure. • Unclear what the regression method is. • Authors say they use Tobit, which does not seem appropriate for a dependent variable with just 3 discrete values. • 0 for no lending relationship, 1 for one lending relationship, 2 for multiple lending relationships. • I would recommend ordered logit.

12. SUGGESTIONS (4) • Problems with the H-Statistic. • Unclear how it is calculated. Appendix says banks are split between large and small banks, so I was expecting 2 statistics, one for large banks, one for small banks. • What value goes in the regressions, an average of the two? • Use of H-Statistic is only appropriate if markets are in long-run equilibrium. • Does not seem likely, given that the authors are discussing a situation of rapid consolidation and increases in competition, transition to the Euro, etc. • I suggest trying the Lerner index, measures of foreign entry, or other measures of competition.

13. SUGGESTIONS (5) • Try different measures of multiple banking relationships. • Unclear why the authors mix in the zero lending relationships with single versus multiple. • They seem to be mixing the decision whether to borrow with whether to borrow from multiple banks. • These are very different decisions with different determinants. • Try two alternative measures. • 1. Single versus multiple lending relationships. • 2. Single versus multiple banking relationships of any type (including having a deposit account). • This is the standard definition of multiple banking.