Advanced Search
MyIDEAS: Login to save this article or follow this journal

An Assessment of the Competition in the Banking Industry: Empirical Evidence from Argentina with Data at Bank Level

Contents:

Author Info

  • Héctor Gustavo González Padilla

    ()
    (Central Bank of Argentina)

Abstract

In the last years, the financial markets have been affected by many events: deregulation, liberalization, globalization and many financial and technological innovations. Each of these events has influenced the condition of competition faced by the banks. In addition, as market power has influenced the profitability of the banks, the competitive behavior has also had impact on the efficiency and stability of the financial system. A healthy competition and a solid market structure are important factors for social welfare, which is reflected in a lower interest rate and a fluid financing for consumers and firms, especially small and medium firms. Market imperfections generated a deficient resources allocation and also a reduction in the benefits that the society derived from the use of the banking system. The literature on the measurement of competition in the banking sector has two branches: a structural approach and a non-structural approach. The structural approach included the Structure-Conduct-Performance paradigm and the efficiency hypothesis, and also many formal approaches with roots in the Industrial Organization theory. These approaches focus on whether a high concentrated market generates a collusive behavior in the big banks that results in a superior market performance or if it is the efficiency of the big banks what increases their performance. In response to the theoretical and empirical deficiencies of the structural models, the non-structural approach for evaluating the competition was developed. Among these models, the main ones are: Iwata’s model (Iwata, 1974), the Bresnahan’s model (Bresnahan, 1982, 1989) and the Panzar-Rose model (Panzar y Rose, 1974). The approach of the New Empirical Industrial Organization tests the competitive behavior and the use of market power by the banks in absence of structural measures. The loan market is related to the traditional activity of banks, lending, which is related to assets of the balance sheet. Taking into account the data requirement of the Bresnahan’s model, the election of loans is also determined by the availability of information on prices and quantities in that market: the amount of loans and interest rates. The Argentine economy between 1991 and 2001 worked under the incentives provided by a fixed exchange rate regime with convertibility of the domestic money known as Plan de Convertibilidad. This regime collapsed at the end of 2001, submerging the Argentine economy into a deep economic and financial crisis. The GDP per capita dropped by 10.8%, and loans and deposits –measured as percentage of GDP– dropped by 0.75% and 2.83% between 2001 and 2002, respectively. The financial sector began to improve at the beginning of 2003 when total deposits, in constant values, began to increase, while total loans, in constant values, began to rise only in 2004. As a consequence of the crisis in the period 2002-2007, fourteen banks went bankrupt, which represented the 14% of the total banks in operation. However the concentration –measured by the Herfindahl-Hirschmann Index (HHI)– in the loan markets was reduced. In this paper we used the methodology suggested by Bresnahan (Bresnahan, 1982) for evaluating if the reduction in the number of banks in the period 2002- 2007 affected the degree of competition of the banking industry in the loans market. With this purpose, we estimated a system of equations of supply and demand for loans for a set of banks, private and public, that operated in Argentina between 2002 and 2007. It must be taken into account that the results from the estimation show both the market structure and the average conditions of competition in the period analyzed. The results of the estimation allow us to say that banks used the market power they had to set their active interest rates. In the loan markets, the coefficient estimated value that shows the use of the market power by standard banks indicated that the banks set their active interest rate at 29.1% over their marginal costs in the period 2002-2007. This value is smaller than the value reported by Delfino (Delfino, 2002) for the period 1993- 2000 –40.3%–. This points out that banks reduced the use of their market power in the loan markets.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bcra.gov.ar/pdfs/investigaciones/55_GonzalezPadilla.pdf
File Function: Spanish version (versión en Español)
Download Restriction: no

Bibliographic Info

Article provided by Central Bank of Argentina, Economic Research Department in its journal Ensayos Económicos.

Volume (Year): 1 (2009)
Issue (Month): 55 (July - September)
Pages: 93-112

as in new window
Handle: RePEc:bcr:ensayo:v:1:y:2009:i:55:p:93-112

Contact details of provider:
Postal: Reconquista 266 - C1003ABF - Buenos Aires
Phone: (54-11) 4348-3582
Fax: (54-11) 4000-1257
Email:
Web page: http://www.bcra.gov.ar
More information through EDIRC

Related research

Keywords: Argentina; banks; Cournot equilibrium; market power; loan markets; oligopoly; perfect competition;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Allen N. Berger & Gerald A. Hanweck & David B. Humphrey, 1986. "Competitive viability in banking: scale, scope, and product mix economies," Research Papers in Banking and Financial Economics 82, Board of Governors of the Federal Reserve System (U.S.).
  2. Shaffer, Sherrill, 1989. "Competition in the U.S. banking industry," Economics Letters, Elsevier, vol. 29(4), pages 321-323.
  3. Shaffer, Sherrill & DiSalvo, James, 1994. "Conduct in a banking duopoly," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1063-1082, December.
  4. Lau, Lawrence J., 1982. "On identifying the degree of competitiveness from industry price and output data," Economics Letters, Elsevier, vol. 10(1-2), pages 93-99.
  5. Mester, Loretta J, 1987. " A Multiproduct Cost Study of Savings and Loans," Journal of Finance, American Finance Association, vol. 42(2), pages 423-45, June.
  6. Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-66, September.
  7. Berg, Sigbjorn Atle & Kim, Moshe, 1994. "Oligopolistic Interdependence and the Structure of Production in Banking: An Empirical Evaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 309-22, May.
  8. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
  9. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 49-61, February.
  10. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92.
  11. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  12. J.A. Bikker, 2003. "Testing for imperfect competition on EU deposit and loan markets with Bresnahan's market power model," Research Series Supervision (discontinued) 52, Netherlands Central Bank, Directorate Supervision.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bcr:ensayo:v:1:y:2009:i:55:p:93-112. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Federico Grillo).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.