Competition in Hong Kong's Banking Sector: A Panzar-Rosse Assessment

A re-examination of the competitive conditions of the banking industry in Hong Kong, based on the Panzar-Rosse approach and using a panel dataset with longer time-series data, reconfirms previous findings in our RM 04/2004 that the degree of competition was fairly high during the period 1992-2002. The empirical analysis also suggests that competitive pressures have been maintained in subsequent years, notwithstanding significant changes in the operating environment. The estimation results showed that competitive pressures were higher among larger banks and lower among smaller banks. This may suggest that while larger banks compete with smaller banks keenly in local retail markets on products such as mortgages and credit cards, they may be subject to even stronger pressures from other competitors at the regional or international levels in the corporate banking market, wealth management and other off-balance sheet activities, where they are more heavily involved. While relaxation of regulations and advances in technology tend to increase competition in the banking system, the effect of consolidation may depend on the prevailing market settings. To the extent that bank consolidation in recent years may have hampered competition, regulatory liberalisation and technological progress appear to have largely offset the adverse effect. The emergence of a number of larger banks through mergers and acquisitions which should be more capable of competing with existing large banks may have also contributed. Nonetheless, with bank consolidation expected to continue, how market concentration may impact on competition in the years to come needs to be closely monitored.