Restructuring,consolidation and competition in Latin American banking markets

This study examines the competitive conditions in the banking industries of eleven Latin American countries for the period 1993–2000. For these countries, the time interval under examination corresponds to an era characterized by substantial reforms to restructure their banking systems, increased consolidation and foreign bank penetration. The banks in our sample are found to be earning their revenues as if operating under monopolistic competition, as in many other developed and emerging financial systems. The results indicate that, overall, market concentration is not significantly related with competitive conduct. At the country level, however, we do observe a decline in competition for Brazil, Chile, and Venezuela in late 1990s which may be attributable to increased consolidation. Further, we observe that deregulation and opening up of the financial markets for foreign participation serves as an important catalyst to increase the competitiveness of banking markets. Higher degree of competition in the sector, in return, is associated with reduced bank margins and profitability but improved cost efficiency.     

Bouncing out of the banking system: An empirical analysis of involuntary bank account closures

Using a new database, we document the determinants of involuntary consumer bank account closures. During 2001–2005, approximately 30 million debit accounts were involuntarily closed for excessive overdrafting. We focus on multiple factors to explain this phenomenon: household economics and financial decision-making ability, social capital, bank policies, and the alternative financial services sector. Involuntary closures are more frequent in US counties with a larger fraction of single mothers, lower education levels, lower wealth, and higher unemployment. Closures are higher in communities with high property crime rates and low electoral participation. Bank policies have an independent relation to closures, with counties having more competitive banking markets and more multi-market banks experiencing higher closure rates; bank structure also seems to affect the speed at which banks adjust their policies to changes in household income. Finally, using both national data and a state-level shift in regulation, we find evidence that access to payday lending leads to higher rates of involuntary account closure.     

Market power in local banking monopolies

By means of two NEIO techniques, this paper analyzes the conduct of a group of Italian single-branch banks operating as monopolists in small local areas (municipalities) in the years 1988–2005, in order to assess pricing behavior in highly concentrated banking markets. Both tests strongly reject the hypothesis of pure monopoly pricing: regardless the advantageous condition, these banks are able to exploit only partially their market power, principally by reason of the nearby competition, the latest banking consolidation trend and the local presence of big banks. Employing another sample, we also show that in duopolistic markets the conduct of single-branch banks is virtually competitive.     

The profitability of small single-market banks in an era of multi-market banking

This paper examines the relationship between the profitability of small single-market banks and the presence in the market of large banking organizations and banking organizations that operate primarily outside of the local banking market. We find that, in rural banking markets, the profitability of small single-market banks is significantly related to the presence of both large and small primarily-out-of-market banks. We also find that an increased presence of large or small primarily-out-of-market banks in rural banking markets reduces the positive effect of an increase in concentration on small single-market bank profits. This finding is consistent with theoretical predictions reported in the recent literature and has important implications for antitrust policy. In urban banking markets, we find little evidence of any relationship between the profitability of small single-market banks and the presence of large or primarily-out-of-market banks.     

Economic value,competition and financial distress in the European banking system

In this paper we examine the impact of a large number of factors at the bank level (liquidity and credit risks, asset size, income diversification and market power), at the industry level (banking concentration) and macro-level (real GDP growth) on bank financial distress using an unbalanced panel of 308 European commercial banks between 1996 and 2009. The observations falling below a given threshold of the empirical distribution of the Shareholder Value Ratio proxy bank financial distress. We employ a panel probit regression and, given the presence of overlapping data giving rise to residual autocorrelation, we use the Bertschek and Lechner (1998) robust estimator of the covariance matrix of parameters. We show that credit risk, liquidity risk and bank market power are the most influential determinants of distressed Shareholder Value Ratio. Finally we evaluate the model out-sample forecasting performance over the 2008–2009 crisis period.     

Obstacles to a global banking system: “Old Europe” versus “New Europe”

“Old Europe” – the developed nations of continental Europe – averages only about 15% foreign bank ownership, whereas “New Europe” – the transition nations of Eastern Europe – averages about 70%. Similar findings hold elsewhere in the world – developed nations tend to have much lower foreign bank ownership shares than developing nations. We examine the causes of the differences within Europe with an eye toward more general conclusions. Our findings suggest that the low foreign bank shares in “Old Europe” – and perhaps developed nations more generally – may primarily result from net comparative disadvantages for foreign banks and relatively high implicit government entry barriers. The high foreign penetration in “New Europe” – and perhaps developing nations more generally – may be due to net comparative advantages for foreign banks and low government entry barriers, particularly in nations that reduced their state bank ownership.     

Does post-crisis restructuring decrease the availability of banking services? The case of Turkey

This study examines the relationship between post-crisis bank consolidation and the number of bank branches in Turkey. Using a unique data set, the analysis addresses several issues related to the impact of market characteristics on branching behavior. The findings suggest that sales of failed institutions by the central authority lead to branch closures in small and uncompetitive markets where the buyer does not have a prior presence. Contrary to popular belief, mergers between healthy institutions do not always cause a decrease in the number of branches; rather, they are shown to increase the availability of banking services in concentrated markets.     

European banking: An overview

Against a background of far-reaching structural change in the banking sector, this article reviews the recent academic literature on developments in European banking. European banking markets have become increasingly integrated in recent years, but barriers to full integration, especially in retail banking, still remain. European integration has possible implications for systemic risk, and poses various challenges for the current supervisory framework. The banks’ responses to the changing competitive environment include the pursuit of strategies of diversification, vertical product differentiation and consolidation. European integration has implications for competition in banking markets, for the nature of long-term borrower-lender relationships, and for the relationships between ownership structure, technological change and bank efficiency. The article concludes by reviewing recent literature on the credit channel in the monetary transmission mechanism, and interest rate pass-through.     

Strategic online banking adoption

In this paper we study the determinants of banks’ decisions to adopt a transactional website for their customers. Using a panel of commercial banks in the United States for the period 2003–2006, we show that although bank-specific characteristics are important determinants of banks’ adoption decisions, competition also plays a prominent role. The extent of competition is related to the geographic overlap of banks in different markets and their relative market share in terms of deposits. In particular, banks adopt online banking services earlier in markets where their competitors have already adopted this technology. This paper is one of the first to construct local banking markets using the geographic market definitions delimited by the CASSIDI® Database compiled at the Federal Reserve Bank of St. Louis.     

The impact of regulatory reforms on cost structure,ownership and competition in Indian banking

This paper evaluates the impact of financial sector reforms on the cost structure characteristics and on the ownership–cost efficiency relationship in Indian banking. It also examines the impact of reforms on the dynamics of competition in the lending market. We find evidence that deregulation improves banks performance and fosters competition in the lending market. Results suggest technological progress, once Indian commercial banks have adjusted to the new regulatory environment. This, however, does not translate in efficiency gains. There is also evidence of an ownership effect on the level and pattern of efficiency change. Finally, competition keeps building pace even in the re-regulation period and technological improvements are not hampered by the tightening of prudential norms.     

The identification of technology regimes in banking: Implications for the market power-fragility nexus

Neglecting the existence of different technologies in banking can contaminate efficiency, market power, and other performance measures. By simultaneously estimating (i) technology regimes conditional on exogenous factors, (ii) efficiency conditional on risk management, and (iii) Lerner indices of German banks, we identify three distinct technology regimes: Public & Retail, Small & Specialized, and Universal & Relationship. System estimation at the regional level reveals that greater bank market power increases bank profitability but also fosters corporate defaults. Corporate defaults, in turn, lead to higher probabilities of bank distress, which supports the market power-fragility hypothesis.     

Product differentiation and efficiencies in the retail banking industry

We empirically quantify the welfare implications of bank entry in the United States between 2000 and 2008. We use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes. We find no evidence for under- or over-entry. Compared with the socially efficient outcome, there is a mild welfare loss resulting from banks entering wrong locations in product space. Compared with the observed outcome, consumer surplus drops by 20–38% and bank profits decline by 48–59% when banks are homogeneous. Therefore product differentiation significantly improves welfare under free entry.     

Bank consolidation and new business formation

As the trend of bank consolidation activities continues to grow in the US and globally, the debate on the impact of such consolidation on small business credits and activities are still inconclusive. Building on the existing research [Berger, A.N., Saunders, A., Scalise, J.M., Udell, G.F., 1998. The effects of bank mergers and acquisitions on small business lending. Journal of Financial Economics 50, 187–229]; [Black, S.E., Strahan, P.E., 2002. Entrepreneurship and bank credit availability. Journal of Finance LVII (6), 2807–2833], this paper investigates the effects of the actual intensity of bank consolidation on the formation of new businesses in the US local markets. Evidence portrays that in the short-run, the overall intensity of bank consolidation is negatively related to the rate of new business formation, and this negative relationship is primarily driven by consolidations initiated by large acquirers. On the contrary, consolidations between small-to-medium sized banks show a positive impact on new business development and these results are consistent even when the M&As are distinguished with respect to in-market or out-of-market acquirers initiating the deals. However, two years after the consolidations, the evidence reveals a positive and significant impact on the rate of new business formation in the local markets for consolidations initiated by large in-market acquirers.     

Cross-selling,switching costs and imperfect competition in British banks

This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993–2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of weaker competitiveness in the loan market. Additionally, the weaker competitiveness in the loan market appears to facilitate the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades.     

Differential impact of Korean banking system reforms on bank productivity

We study the impact of banking system reforms during a crisis following a period of undisciplined lending. Regulatory changes aimed at strengthening the banks’ capital structure and risk management practices do not have a uniform impact on bank productivity, but rather favor financially sound or strategically privileged banks. We present evidence documenting the differential impact of regulatory reforms on Korean commercial bank productivity over the period 1995–2005. Average technical efficiency of banks decreased during the financial crisis of 1997–1998. It improved following the subsequent bank restructuring and continued to improve through 2005. The capital adequacy ratio is positively associated with banks’ technical efficiency. The non-performing loans ratio is negatively associated with technical efficiency. Both relationships are accentuated during the crisis but attenuated after the reforms.     

The Competitive Dynamics of Geographic Deregulation in Banking: Implications for Productive Efficiency

Deregulation of geographic restrictions in banking over the past 20 years has intensified both potential and actual competition in the industry. The accumulating empirical evidence suggests that potential efficiency gains associated with consolidating banks are often not realized. We evaluate the impact of this increased competition on the productive efficiency of non-merging banks confronted with new entry in their local markets and find that the incumbent banks respond by improving cost efficiency. Thus, studies evaluating the impact of bank mergers on the efficiency of the combining parties alone may be overlooking the most significant welfare-enhancing aspect of merger activity.     

Consolidation in banking and financial stability in Europe: Empirical evidence

Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 we provide empirical evidence that national banking market concentration has a negative impact on European banks’ financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, our analysis reveals that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union.     

Banks’ capital buffer,risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes

Using quarterly financial statements and stock market data from 1982 to 2010 for the six largest Canadian chartered banks, this paper documents positive co-movement between Canadian banks’ capital buffer and business cycles. The adoption of Basel Accords and the balance sheet leverage cap imposed by Canadian banking regulations did not change this cyclical behavior of Canadian bank capital. We find Canadian banks to be well-capitalized and that they hold a larger capital buffer in expansion than in recession, which may explain how they weathered the recent subprime financial crisis so well. This evidence that Canadian banks ride the business and regulatory periods underscores the appropriateness of a both micro- and a macro-prudential “through-the-cycle” approach to capital adequacy as advocated in the proposed Basel III framework to strengthen the resilience of the banking sector.     

Government, taxes and banking crises

This paper analyzes the effectiveness of different government policies to prevent the emergence of banking crises. In particular, we study the impact on welfare of using taxpayers money to recapitalize banks, government injection of money into the banking system through credit lines, the creation of a buffer and taxes on financial transactions (the Tobin tax). We illustrate the trade-off between these policies and derive policy implications.     

An investigation on the causal relationships between banking concentration and economic growth

This paper explores the causality between concentration in the banking industry and economic growth. Two empirical tests are performed for Italy over the period 1991-2001: the first one is a standard Granger-Sims causality test, the second one studies the direction of causality by taking into account the impact of changes in banks' internal and external factors on their own market shares. The results show that in the short-run economic growth is predominantly caused by banking consolidation, while in the long-run a reverse causation direction emerges, so that economic expansions tend to reduce market shares and thus favour a stronger competition in the industry.