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Effect of Liberalization on Banking Competition

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  • Gloria Pasadilla

    (PIDS)

  • Melanie Milo

Abstract

The paper analyzes the impact of major policy changes on banking structure, performance and competition, using bank-specific data from 1990-2002. We find that the entry of more market players is correlated with drops in interest spread and profits which, partly, bespeaks of possible dissipation of previous monopoly profits of large commercial banks. We also compute the H-stat based on the Panzar-Rosse methodology and find that, in general, despite the characteristic presence of few, large commercial banks, the sector is fairly competitive, specially in the loan-granting business. Moreover, competition has increased in the latter half of 1990s, primarily due to the presence of more small commercial banks, rather than big banks.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22676.

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Date of creation: Jan 2005
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Handle: RePEc:eab:develo:22676

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Keywords: banking reform; bank liberalization; h-statistics; competition policy; Panzar- Rosse methodology;

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References

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  1. Edita A. Tan, 1989. "Bank Concentration and the Structure of Interest," UP School of Economics Discussion Papers, University of the Philippines School of Economics 198915, University of the Philippines School of Economics.
  2. Nicola Cetorelli, 1999. "Competitive analysis in banking: appraisal of the methodologies," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q I, pages 2-15.
  3. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 35(4), pages 443-56, June.
  4. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 71(2), pages 291-99, May.
  5. Molyneux, Phil & Lloyd-Williams, D. M. & Thornton, John, 1994. "Competitive conditions in european banking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 18(3), pages 445-459, May.
  6. J.A. Bikker & K. Haaf, 2001. "Competition, Concentration and their Relationship: an EmpiricalAnalysis of the Banking Industry," DNB Staff Reports (discontinued), Netherlands Central Bank 68, Netherlands Central Bank.
  7. Nicola Cetorelli & Paolo Angelini, 1999. "Bank competition and regulatory reform: the case of the Italian banking industry," Working Paper Series, Federal Reserve Bank of Chicago WP-99-32, Federal Reserve Bank of Chicago.
  8. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series, The World Bank 1900, The World Bank.
  9. Sherrill Shaffer, 1990. "A test of competition in Canadian banking," Working Papers, Federal Reserve Bank of Philadelphia 90-18, Federal Reserve Bank of Philadelphia.
  10. Asli Demirguc-Kunt & Luc Laeven & Ross Levine, 2003. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," NBER Working Papers, National Bureau of Economic Research, Inc 9890, National Bureau of Economic Research, Inc.
  11. James R. Barth & Gerard Caprio, Jr. & Ross Levine, 2002. "Bank Regulation and Supervision: What Works Best?," NBER Working Papers, National Bureau of Economic Research, Inc 9323, National Bureau of Economic Research, Inc.
  12. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(2-4), pages 135-194, February.
  13. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(6), pages 1045-1066, June.
  14. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers, Dipartimento Scienze Economiche, Universita' di Bologna 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  15. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 22(3), pages 576-94, August.
  16. Lau, Lawrence J., 1982. "On identifying the degree of competitiveness from industry price and output data," Economics Letters, Elsevier, Elsevier, vol. 10(1-2), pages 93-99.
  17. Claessens, Stijn & Demirguc-Kunt, Asl[iota] & Huizinga, Harry, 2001. "How does foreign entry affect domestic banking markets?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(5), pages 891-911, May.
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Cited by:
  1. K.C. Fung, 2007. "Service trade liberalization as a development opportunity - the role for the World Trade Organization," STUDIES IN TRADE AND INVESTMENT, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), in: Mia Mikic (ed.), FUTURE TRADE RESEARCH AREAS THAT MATTER TO DEVELOPING COUNTRY POLICYMAKERS, volume 61, chapter 3, pages 67-82 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

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