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Efficiency and market power in Latin American banking

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  • Williams, Jonathan

Abstract

I examine the relationship between bank efficiency and market power to test the quiet life hypothesis for a sample of 419 Latin American commercial banks between 1985 and 2010. A two-stage least squares model with instrumental variables controls for the simultaneous relationship between efficiency and market power. Citing developments in efficiency modelling, efficiencies are drawn from the random parameters stochastic frontier function model that treats unobserved heterogeneity, whilst conventional Lerner indices and the efficiency adjusted Lerner index proxy market power. The quiet life hypothesis is firmly rejected after various robustness checks. To test if bank restructuring and governance changes affect efficiency and market power, I use a difference-in-differences approach to determine the impact of bank privatisation and foreign acquisition of local banks on efficiency and market power. Privatisation is preferred over foreign acquisition though its impact is concentrated on efficiency rather than market power. The evidence suggests that bank restructuring has promoted competition at the expense of market power and yielded efficiency gains at banks under conditions of monopolistic competition.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 8 (2012)
Issue (Month): 4 ()
Pages: 263-276

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Handle: RePEc:eee:finsta:v:8:y:2012:i:4:p:263-276

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Bank efficiency; Market power; Competition; Stochastic frontiers; Governance;

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References

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Cited by:
  1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Macroprudential Regulation and the Monetary Transmission Mechanism," Centre for Growth and Business Cycle Research Discussion Paper Series 185, Economics, The Univeristy of Manchester.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  3. Goddard, John & Molyneux, Philip & Williams, Jonathan, 2014. "Dealing with cross-firm heterogeneity in bank efficiency estimates: Some evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 130-142.

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