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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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Fax: + 358 10 831 2294
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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. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  2. Zarruk, Emilio R., 1989. "Bank spread with uncertain deposit level and risk aversion," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 797-810, December.
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  4. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers.
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  8. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November.
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  12. 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.
  13. Molnár, József, 2008. "Market power and merger simulation in retail banking," Research Discussion Papers 4/2008, Bank of Finland.
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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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