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Colombian bank efficiency and the role of market structure

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  • Diana Fernández Moreno
  • Dairo Estrada

Abstract

Colombia’s financial system has undertaken major changes during the last decade, with new regulatory regimes being implemented, as well as a significant expansion of financial services. Nevertheless, the recent literature has yet to analyze this new epoch for banking institutions under an efficiency framework. Taking into account the availability of new information and the methodological advances of recent years, our purpose is to study the evolution of bank efficiency during the past few years, as well as to evaluate the influence of some market structure variables on the latter. We find evidence, both under SFA and Order-m, supporting an increase in efficiency over time. Moreover, relating the latter with market structure variables suggests that there is a positive relationship between market power and efficiency; this occurs due to product differentiation, which allows banks to gain in efficiency provided they don’t set excessive credit prices. Nonetheless, there is an open debate concerning the behavior of banks with the highest market shares, since the negative relation between market concentration and efficiency advocates for a "quiet life form", where banks don’t have incentives to fully minimize costs. Additional to these results, we provide evidence of potential impacts that mergers and credit specialization may have on efficiency.

Suggested Citation

  • Diana Fernández Moreno & Dairo Estrada, 2013. "Colombian bank efficiency and the role of market structure," Temas de Estabilidad Financiera 076, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:temest:076
    DOI: 10.32468/tef.76
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    References listed on IDEAS

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    Cited by:

    1. Almanza, Camilo & Mora Rodríguez, Jhon James, 2018. "Profit efficiency of banks in Colombia with undesirable output: A directional distance function approach," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-18.
    2. 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.
    3. Carolina Ortega Londono, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo CIEF 016792, Universidad EAFIT.
    4. Carolina Ortega Londono & Diego Restrepo, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo CIEF 016987, Universidad EAFIT.
    5. Sarmiento, Miguel & Galán, Jorge E., 2014. "Heterogeneous effects of risk-taking on bank efficiency : a stochastic frontier model with random coefficients," DES - Working Papers. Statistics and Econometrics. WS ws142013, Universidad Carlos III de Madrid. Departamento de Estadística.

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    More about this item

    Keywords

    Bank Efficiency; Concentration; Market Power; Stochastic Frontier Analysis; Order-m.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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