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Colombian bank efficiency and the role of market structure

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  • Diana Fernández Moreno

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  • Dairo Estrada

    ()

Abstract

Colombia’s financial system has undertaken major changes during the last decade, with new regulatory regimes being implemented, as well as a significant expansion of financial services. Nevertheless, the recent literature has yet to analyze this new epoch for banking institutions under an efficiency framework. Taking into account the availability of new information and the methodological advances of recent years, our purpose is to study the evolution of bank efficiency during the past few years, as well as to evaluate the influence of some market structure variables on the latter. We find evidence, both under SFA and Order-m, supporting an increase in efficiency over time. Moreover, relating the latter with market structure variables suggests that there is a positive relationship between market power and efficiency; this occurs due to product differentiation, which allows banks to gain in efficiency provided they don’t set excessive credit prices. Nonetheless, there is an open debate concerning the behavior of banks with the highest market shares, since the negative relation between market concentration and efficiency advocates for a "quiet life form", where banks don’t have incentives to fully minimize costs. Additional to these results, we provide evidence of potential impacts that mergers and credit specialization may have on efficiency.

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Paper provided by Banco de la Republica de Colombia in its series Temas de Estabilidad Financiera with number 076.

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Handle: RePEc:bdr:temest:076

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Keywords: Bank Efficiency; Concentration; Market Power; Stochastic Frontier Analysis; Order-m. Classification JEL: C14; D40; D61; G21;

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  1. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  2. Harald Tauchmann, 2012. "Partial frontier efficiency analysis," Stata Journal, StataCorp LP, vol. 12(3), pages 461-478, September.
  3. José Luis Carreño & Gino Loyola & Yolanda Portilla, 2010. "Eficiencia Bancaria en Chile: un Enfoque de Frontera de Beneficios," Working Papers Central Bank of Chile 603, Central Bank of Chile.
  4. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January.
  5. Nicholas Apergis & Effrosyni Alevizopoulou, 2011. "Bank Efficiency: Evidence from a Panel of European Banks," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(3), pages 329-341, September.
  6. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, vol. 32(4), pages 435-50, June.
  7. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  8. Sufian, Fadzlan, 2009. "Determinants of bank efficiency during unstable macroeconomic environment: Empirical evidence from Malaysia," Research in International Business and Finance, Elsevier, vol. 23(1), pages 54-77, January.
  9. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  10. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Bank efficiency in transition economies: recent evidence from South-Eastern Europe," Research Discussion Papers 5/2011, Bank of Finland.
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