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Bank pricing under oligopsony-oligopoly: Evidence from 103 developing countries

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  • Marrouch, Walid

    ()
    (BOFIT)

  • Turk-Ariss, Rima

    (BOFIT)

Abstract

We propose a generic oligopsony-oligopoly model to study bank behavior under uncertainty in developing countries. We derive a pricing structure that acknowledges market power in both the deposit and loan markets and identify two theoretical components to the loan rate: a rent extraction component resulting from the interaction between the choke price of loans and prevailing banking structures, and a markup on deposit funding costs that captures the transformation efficiency of financial intermediation. We then test our structural specification with longitudinal data for 103 non-OECD countries and find that both the market structure under uncertainty and the deposit rate matter significantly in pricing. However, the role played by the rent-extraction share in pricing, on average, dominates funding costs in developing countries, and so underscores the importance of market structure in banks’ pricing power.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 1/2012.

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Length: 26 pages
Date of creation: 23 Feb 2012
Date of revision:
Handle: RePEc:hhs:bofitp:2012_001

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
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Web page: http://www.suomenpankki.fi/bofit_en/
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Related research

Keywords: intermediation; bank pricing; market structure; uncertainty; developing countries;

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References

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  1. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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  6. Kwangwoo Park & George Pennacchi, 2007. "Harming depositors and helping borrowers: the disparate impact of bank consolidation," Working Paper 0704, Federal Reserve Bank of Cleveland.
  7. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March.
  8. Kit, Pong Wong, 1997. "On the determinants of bank interest margins under credit and interest rate risks," Journal of Banking & Finance, Elsevier, vol. 21(2), pages 251-271, February.
  9. Allen, Linda, 1988. "The Determinants of Bank Interest Margins: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 231-235, June.
  10. Molnár, József, 2008. "Market power and merger simulation in retail banking," Research Discussion Papers 4/2008, Bank of Finland.
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  13. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
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Cited by:
  1. Drumond, Inês & Jorge, José, 2013. "Loan interest rates under risk-based capital requirements: The impact of banking market structure," Economic Modelling, Elsevier, vol. 32(C), pages 602-607.

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