IDEAS home Printed from https://ideas.repec.org/a/eee/mulfin/v61y2021ics1042444x21000013.html
   My bibliography  Save this article

The impact of competition and bank market regulation on banks’ cost efficiency

Author

Listed:
  • Yin, Haiyan

Abstract

With a comprehensive dataset covering 148 countries over 1995–2015, this study investigates the relationship between competition and efficiency in the banking industry. Evidence shows that bank competition is detrimental to cost efficiency, which is at variance with the intuitive “quiet life” hypothesis. The bank regulatory and institutional environment in which banks operate not only influences bank efficiency, but also affects the link between competition and efficiency. Restrictive regulations on bank activities and stringent capital requirements reduce, whereas effective supervision and information sharing of credit registries increase efficiency. The adverse impact of competition on efficiency can be mitigated or even reversed by well-implemented regulations, supervision, and information sharing mechanisms.

Suggested Citation

  • Yin, Haiyan, 2021. "The impact of competition and bank market regulation on banks’ cost efficiency," Journal of Multinational Financial Management, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:mulfin:v:61:y:2021:i:c:s1042444x21000013
    DOI: 10.1016/j.mulfin.2021.100677
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042444X21000013
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mulfin.2021.100677?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fungáčová, Zuzana & Pessarossi, Pierre & Weill, Laurent, 2013. "Is bank competition detrimental to efficiency? Evidence from China," China Economic Review, Elsevier, vol. 27(C), pages 121-134.
    2. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    3. Jayaratne, Jith & Strahan, Philip E, 1998. "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 239-273, April.
    4. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.
    5. Stijn Claessens & Luc Laeven, 2005. "Financial Dependence, Banking Sector Competition, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 179-207, March.
    6. Anca Pruteanu-Podpiera & Franziska Schobert & Laurent Weill, 2008. "Banking competition and cost efficiency: a micro-data analysis on the Czech banking industry," ULB Institutional Repository 2013/14307, ULB -- Universite Libre de Bruxelles.
    7. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, June.
    8. Anca Pruteanu-Podpiera & Laurent Weill & Franziska Schobert, 2008. "Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 50(2), pages 253-273, June.
    9. Allen N. Berger & Leora F. Klapper & Rima Turk-Ariss, 2017. "Bank competition and financial stability," Chapters, in: Jacob A. Bikker & Laura Spierdijk (ed.), Handbook of Competition in Banking and Finance, chapter 10, pages 185-204, Edward Elgar Publishing.
    10. Yin, Haiyan, 2019. "Bank globalization and financial stability: International evidence," Research in International Business and Finance, Elsevier, vol. 49(C), pages 207-224.
    11. Michael Koetter & James W. Kolari & Laura Spierdijk, 2012. "Enjoying the Quiet Life under Deregulation? Evidence from Adjusted Lerner Indices for U.S. Banks," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 462-480, May.
    12. James R. Barth & Gerard Caprio & Ross Levine, 2013. "Bank regulation and supervision in 180 countries from 1999 to 2011," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 5(2), pages 111-219, May.
    13. Barth, James R. & Lin, Chen & Ma, Yue & Seade, Jesús & Song, Frank M., 2013. "Do bank regulation, supervision and monitoring enhance or impede bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2879-2892.
    14. Williams, Jonathan, 2012. "Efficiency and market power in Latin American banking," Journal of Financial Stability, Elsevier, vol. 8(4), pages 263-276.
    15. Barbara Casu & Claudia Girardone, 2006. "Bank Competition, Concentration And Efficiency In The Single European Market," Manchester School, University of Manchester, vol. 74(4), pages 441-468, July.
    16. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2005. "Bank performance, efficiency and ownership in transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 31-53, January.
    17. Turk Ariss, Rima, 2010. "On the implications of market power in banking: Evidence from developing countries," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 765-775, April.
    18. Ana Lozano-Vivas & Jesús Pastor & José Pastor, 2002. "An Efficiency Comparison of European Banking Systems Operating under Different Environmental Conditions," Journal of Productivity Analysis, Springer, vol. 18(1), pages 59-77, July.
    19. Demirguc-Kunt, Asli & Peria, Maria Soledad Martinez, 2010. "A framework for analyzing competition in the banking sector : an application to the case of Jordan," Policy Research Working Paper Series 5499, The World Bank.
    20. Klaus Schaeck & Martin Cihák, 2014. "Competition, Efficiency, and Stability in Banking," Financial Management, Financial Management Association International, vol. 43(1), pages 215-241, March.
    21. Charles S. Morris, 2011. "What should banks be allowed to do?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q IV), pages 55-80.
    22. Yin, Haiyan & Yang, Jiawen & Lu, Xing, 2020. "Bank globalization and efficiency: Host- and home-country effects," Research in International Business and Finance, Elsevier, vol. 54(C).
    23. Maudos, Joaquin & de Guevara, Juan Fernandez, 2007. "The cost of market power in banking: Social welfare loss vs. cost inefficiency," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2103-2125, July.
    24. DeYoung, Robert & Hasan, Iftekhar & Kirchhoff, Bruce, 1998. "The Impact of Out-of-State Entry on the Cost Efficiency of Local Commercial Banks," Journal of Economics and Business, Elsevier, vol. 50(2), pages 191-203, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fall, François Seck & Tchakoute Tchuigoua, Hubert & Vanhems, Anne & Simar, Léopold, 2022. "Investigating the unobserved heterogeneity effect on microfinance social efficiency," LIDAM Discussion Papers ISBA 2022010, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    2. F. S. Fall & H. Tchakoute Tchuigoua & A. Vanhems & L. Simar, 2023. "Investigating the unobserved heterogeneity effect on outreach to women: lessons from microfinance institutions," Annals of Operations Research, Springer, vol. 328(2), pages 1365-1386, September.
    3. Samia Nasreen & Mehwish Gulzar & Muhammad Afzal & Muhammad Umar Farooq, 2024. "The Role of Corruption, Transparency, and Regulations on Asian Banks’ Performance: An Empirical Analysis," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 6475-6506, June.
    4. Kuessi, Richard & Nantob, N'Yilimon & Aguey, Segnon & Couchoro, Mawuli Kodjovi, 2023. "Competition and banking efficiency in the WAEMU: The role of multinationals and institutions," International Economics, Elsevier, vol. 175(C), pages 45-62.
    5. Bayeh, Antonio & Bitar, Mohammad & Burlacu, Radu & Walker, Thomas, 2021. "Competition, securitization, and efficiency in US banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 553-576.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yin, Haiyan & Yang, Jiawen & Lu, Xing, 2020. "Bank globalization and efficiency: Host- and home-country effects," Research in International Business and Finance, Elsevier, vol. 54(C).
    2. Bayeh, Antonio & Bitar, Mohammad & Burlacu, Radu & Walker, Thomas, 2021. "Competition, securitization, and efficiency in US banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 553-576.
    3. Brei, Michael & Jacolin, Luc & Noah, Alphonse, 2020. "Credit risk and bank competition in Sub-Saharan Africa," Emerging Markets Review, Elsevier, vol. 44(C).
    4. El Moussawi, Chawki & Mansour, Rana, 2022. "Competition, cost efficiency and stability of banks in the MENA region," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 143-170.
    5. Wu, Ji & Guo, Mengmeng & Chen, Minghua & Jeon, Bang Nam, 2019. "Market power and risk-taking of banks: Some semiparametric evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 41(C).
    6. Yin, Haiyan, 2021. "Foreign bank entry and bank competition: Cross-country heterogeneity," Global Finance Journal, Elsevier, vol. 48(C).
    7. Moses Nyangu & Nyankomo Marwa & Ashenafi Fanta, 2023. "What drives financial stability? the nexus between market power and bank efficiency within the East African Community," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 21(3), pages 403-428, July.
    8. 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.
    9. Kumar Debasis Dutta & Mallika Saha, 2021. "Do competition and efficiency lead to bank stability? Evidence from Bangladesh," Future Business Journal, Springer, vol. 7(1), pages 1-12, December.
    10. Leroy, Aurélien & Lucotte, Yannick, 2017. "Is there a competition-stability trade-off in European banking?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 199-215.
    11. Duc-Nguyen, Nguyen & Mishra, Anil V. & Daly, Kevin, 2023. "Variation in the competition − Efficiency nexus: Evidence from emerging markets," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 401-420.
    12. Zouaoui, Haykel & Zoghlami, Feten, 2020. "On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach," Research in International Business and Finance, Elsevier, vol. 52(C).
    13. Cuestas, Juan Carlos & Lucotte, Yannick & Reigl, Nicolas, 2017. "Banking sector concentration, competition and financial stability: the case of the Baltic countries," Bank of Estonia Working Papers wp2017-7, Bank of Estonia, revised 11 Sep 2017.
    14. Juan Carlos CUESTAS & Yannick LUCOTTE & Nicolas REIGL, 2019. "Banking sector concentration, competition and financial stability: the case of the Baltic countries," LEO Working Papers / DR LEO 2731, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    15. Jayakumar, Manju & Pradhan, Rudra P. & Dash, Saurav & Maradana, Rana P. & Gaurav, Kunal, 2018. "Banking competition, banking stability, and economic growth: Are feedback effects at work?," Journal of Economics and Business, Elsevier, vol. 96(C), pages 15-41.
    16. Phan, Hien Thu & Anwar, Sajid & Alexander, W. Robert J. & Phan, Hanh Thi My, 2019. "Competition, efficiency and stability: An empirical study of East Asian commercial banks," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    17. Yang, Jun & Shao, Hanhua, 2016. "Impact of bank competition on the bank lending channel of monetary transmission: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 468-481.
    18. Fungáčová, Zuzana & Pessarossi, Pierre & Weill, Laurent, 2013. "Is bank competition detrimental to efficiency? Evidence from China," China Economic Review, Elsevier, vol. 27(C), pages 121-134.
    19. Al-Shboul, Mohammad & Maghyereh, Aktham & Hassan, Abul & Molyneux, Phillip, 2020. "Political risk and bank stability in the Middle East and North Africa region," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    20. repec:zbw:bofitp:2012_031 is not listed on IDEAS
    21. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.

    More about this item

    Keywords

    Bank competition; Bank efficiency; Bank regulation; International evidence;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mulfin:v:61:y:2021:i:c:s1042444x21000013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/mulfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.