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Efficiency and market power in Latin American banking

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  • Williams, Jonathan

Abstract

I examine the relationship between bank efficiency and market power to test the quiet life hypothesis for a sample of 419 Latin American commercial banks between 1985 and 2010. A two-stage least squares model with instrumental variables controls for the simultaneous relationship between efficiency and market power. Citing developments in efficiency modelling, efficiencies are drawn from the random parameters stochastic frontier function model that treats unobserved heterogeneity, whilst conventional Lerner indices and the efficiency adjusted Lerner index proxy market power. The quiet life hypothesis is firmly rejected after various robustness checks. To test if bank restructuring and governance changes affect efficiency and market power, I use a difference-in-differences approach to determine the impact of bank privatisation and foreign acquisition of local banks on efficiency and market power. Privatisation is preferred over foreign acquisition though its impact is concentrated on efficiency rather than market power. The evidence suggests that bank restructuring has promoted competition at the expense of market power and yielded efficiency gains at banks under conditions of monopolistic competition.

Suggested Citation

  • Williams, Jonathan, 2012. "Efficiency and market power in Latin American banking," Journal of Financial Stability, Elsevier, vol. 8(4), pages 263-276.
  • Handle: RePEc:eee:finsta:v:8:y:2012:i:4:p:263-276
    DOI: 10.1016/j.jfs.2012.05.001
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    Cited by:

    1. Andrieş, Alin Marius & Căpraru, Bogdan, 2014. "The nexus between competition and efficiency: The European banking industries experience," International Business Review, Elsevier, vol. 23(3), pages 566-579.
    2. Apergis, Nicholas, 2015. "Competition in the banking sector: New evidence from a panel of emerging market economies and the financial crisis," Emerging Markets Review, Elsevier, vol. 25(C), pages 154-162.
    3. Sarmiento, Miguel & Galán, Jorge E., 2017. "The influence of risk-taking on bank efficiency: Evidence from Colombia," Emerging Markets Review, Elsevier, vol. 32(C), pages 52-73.
    4. Aiello, Francesco & Bonanno, Graziella, 2014. "On the Sources of Heterogeneity in Banking Efficiency Literature," MPRA Paper 58591, University Library of Munich, Germany.
    5. Francesco Aiello & Graziella Bonanno, 2016. "Efficiency in banking: a meta-regression analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 112-149, January.
    6. Eduardo A. Cavallo & Tomás Serebrisky & Verónica Frisancho & Jonathan Karver & Andrew Powell & Diego Margot & Ancor Suárez-Alemán & Eduardo Fernández-Arias & Matías Marzani & Solange Berstein & Marian, 2016. "Saving for Development: How Latin America and the Caribbean Can Save More and Better," IDB Publications (Books), Inter-American Development Bank, number 94597 edited by Eduardo A. Cavallo & Tomás Serebrisky, February.
    7. Goddard, John & Molyneux, Philip & Williams, Jonathan, 2014. "Dealing with cross-firm heterogeneity in bank efficiency estimates: Some evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 130-142.
    8. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    9. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," Working Papers halshs-01164864, HAL.
    10. repec:spd:journl:v:67:y:2017:i:2:p:3-25 is not listed on IDEAS
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    13. Robert Alexander & Hien Thu Phan & Sajid Anwar, 2016. "Cost Efficiency of the Hong Kong Banking Sector: A Two-Stage DEA Window Analysis," EcoMod2016 9846, EcoMod.
    14. M. Brei & L. Jacolin & A. Noah, 2018. "Credit risk and bank competition in Sub-Saharan Africa," Working papers 664, Banque de France.
    15. Thi My Phan, Hanh & Daly, Kevin & Akhter, Selim, 2016. "Bank efficiency in emerging Asian countries," Research in International Business and Finance, Elsevier, vol. 38(C), pages 517-530.
    16. Hakan Güneş & Dilem Yıldırım, 2016. "Estimating Cost Efficiency of Turkish Commercial Banks under Unobserved Heterogeneity with Stochastic Frontier Models," ERC Working Papers 1603, ERC - Economic Research Center, Middle East Technical University, revised Mar 2016.

    More about this item

    Keywords

    Bank efficiency; Market power; Competition; Stochastic frontiers; Governance;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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