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Market Power and Efficiency in the Czech Banking Sector

Author

Listed:
  • Anca Pruteanu-Podpiera
  • Laurent Weill
  • Franziska Schobert

Abstract

Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring a reduction of loan rates and then investment. These expected gains are a major issue for transition countries, in which bank credit represents the largest source of external finance for companies. With the use of exhaustive quarterly data for Czech banks, this paper aims to provide evidence on the effects of banking competition in the Czech Republic. First, we measure the level and evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, using data on loan prices. The results do not show a clear-cut trend in the evolution of the Lerner index. Second, we investigate the relationship and causality between competition and efficiency. We perform a Granger-causality-type analysis. This supports the 'banking specificities' hypothesis, according to which heightened competition can lead to an increase in monitoring costs through a reduction in the length of the customer relationship and due to the presence of economies of scale in the banking sector, in this way reducing the cost efficiency of banks. Therefore, our results reject the intuitive 'quiet life' hypothesis and indicate a negative relationship between competition and efficiency in banking.

Suggested Citation

  • Anca Pruteanu-Podpiera & Laurent Weill & Franziska Schobert, 2007. "Market Power and Efficiency in the Czech Banking Sector," Working Papers 2007/6, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:wpaper:2007/6
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    File URL: https://www.cnb.cz/export/sites/cnb/en/economic-research/.galleries/research_publications/cnb_wp/cnbwp_2007_06.pdf
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    References listed on IDEAS

    as
    1. Ales Bulir & Jaromir Hurnik, 2006. "The Maastricht Inflation Criterion: "Saints" and "Sinners"," Working Papers 2006/8, Czech National Bank, Research and Statistics Department.
    2. Williams, Jonathan, 2004. "Determining management behaviour in European banking," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2427-2460, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Havranek, Tomas & Irsova, Zuzana & Lesanovska, Jitka, 2016. "Bank efficiency and interest rate pass-through: Evidence from Czech loan products," Economic Modelling, Elsevier, vol. 54(C), pages 153-169.
    2. Ayesha Hameed & Tahir Saeed Jagirani & Mohammad Qamar Qureshi & Aisha Riaz, 2024. "The Causal Linkages between Market Power and Cost Efficiency: Testing Quiet Life Hypothesis for the Banking Industry," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(1), pages 803-811.
    3. Tumer-Alkan, G., 2008. "Essays on banking," Other publications TiSEM 8d5ec521-4702-4e75-bc79-a, Tilburg University, School of Economics and Management.
    4. Martin Mandel & Vladimír Tomšík, 2011. "Regulace bankovního sektoru z pohledu ekonomické teorie [Regulation of the Banking Sector From the Economic Theory´s Point of View]," Politická ekonomie, Prague University of Economics and Business, vol. 2011(1), pages 58-81.
    5. Maman Setiawan, 2023. "Measuring the Competition Index in the Indonesian Manufacturing Industry: The Structure–Conduct–Performance Paradigm," Sustainability, MDPI, vol. 15(15), pages 1-13, July.
    6. Alshammari, Ahmad Alrazni & Syed Jaafar Alhabshi, Syed Musa bin & Saiti, Buerhan, 2019. "The impact of competition on cost efficiency of insurance and takaful sectors: Evidence from GCC markets based on the Stochastic Frontier Analysis," Research in International Business and Finance, Elsevier, vol. 47(C), pages 410-427.
    7. Alexander Schiersch & Jens Schmidt-Ehmcke, 2010. "Empiricism Meets Theory: Is the Boone-Indicator Applicable?," Discussion Papers of DIW Berlin 1030, DIW Berlin, German Institute for Economic Research.
    8. Schiersch Alexander & Schmidt-Ehmcke Jens, 2011. "Is the Boone-Indicator Applicable? – Evidence from a Combined Data Set of German Manufacturing Enterprises," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(3), pages 336-357, June.

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    More about this item

    Keywords

    Banks; competition; efficiency; transition countries;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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