The law of proportionate effect and OECD bank sectors

This paper investigates the growth dynamics of the bank sectors in the OECD area over the period 1985-1994 and examines whether the structural financial reforms of the late 1980s have affected their growth path. Based on a test of Gibrat’s law of proportionate effect, we find that the 1985-89 period was characterised by size convergence, implying that smaller bank sectors were expanding more rapidly. However, in the 1990-94 period the pattern reversed to proportionate growth. The analysis of the determinants of bank market growth reveals that macroeconomic growth, operational bank efficiency, credit quality, and capitalisation are the main drivers of bank industry growth.