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Market Power and Efficiency in the Czech Banking Sector

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  • Anca Pruteanu-Podpiera
  • Laurent Weill
  • Franziska Schobert

Abstract

Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring a reduction of loan rates and then investment. These expected gains are a major issue for transition countries, in which bank credit represents the largest source of external finance for companies. With the use of exhaustive quarterly data for Czech banks, this paper aims to provide evidence on the effects of banking competition in the Czech Republic. First, we measure the level and evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, using data on loan prices. The results do not show a clear-cut trend in the evolution of the Lerner index. Second, we investigate the relationship and causality between competition and efficiency. We perform a Granger-causality-type analysis. This supports the ‘banking specificities’ hypothesis, according to which heightened competition can lead to an increase in monitoring costs through a reduction in the length of the customer relationship and due to the presence of economies of scale in the banking sector, in this way reducing the cost efficiency of banks. Therefore, our results reject the intuitive ‘quiet life’ hypothesis and indicate a negative relationship between competition and efficiency in banking.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2007/6.

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Date of creation: Dec 2007
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Handle: RePEc:cnb:wpaper:2007/6

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Keywords: Banks; competition; efficiency; transition countries.;

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References

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  1. Williams, Jonathan, 2004. "Determining management behaviour in European banking," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2427-2460, October.
  2. Ales Bulir & Jaromir Hurnik, 2006. "The Maastricht Inflation Criterion: "Saints" and "Sinners"," Working Papers 2006/8, Czech National Bank, Research Department.
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Cited by:
  1. Martin Mandel & Vladimír Tomšík, 2011. "Regulation of the Banking Sector From the Economic Theory´s Point of View," Politická ekonomie, University of Economics, Prague, vol. 2011(1), pages 58-81.
  2. Alexander Schiersch & Jens Schmidt-Ehmcke, 2011. "Is the Boone-Indicator Applicable? – Evidence from a Combined Data Set of German Manufacturing Enterprises," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(3), pages 336-357, June.
  3. Alexander Schiersch & Jens Schmidt-Ehmcke, 2010. "Empiricism Meets Theory: Is the Boone-Indicator Applicable?," Discussion Papers of DIW Berlin 1030, DIW Berlin, German Institute for Economic Research.
  4. Tumer-Alkan, G., 2008. "Essays on Banking," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3160796, Tilburg University.

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