Efficiency,growth and market power in the banking industry: New approach to efficient structure hypothesis

We extend the work of Homma, Tsutsui, and Uchida (2014) to provide empirical evidence on nexus of relationships in efficient structure (ES) hypothesis. In this framework, we test causality from cost efficiency to bank growth and then from bank growth to market concentration. We apply this approach to banking industry in Association of South East Asian (ASEAN) over the period of 1999–2014. The efficiency scores have been estimated by employing Slack Based Measurements Data Envelopment Analysis (SMB DEA). We apply Two-step system Generalized Method of Moments (GMM) and Panel Vector Auto Regression (PVAR) to account for endogeneity in estimation models. The results show that cost efficiency enables the banks to grow and obtain higher market share. The resultant growth then leads to higher market concentration/bank market power. There is also some evidence to support for quiet life (QL) hypothesis. Therefore, both ES and QL hypotheses may coexist in ASEAN banking industry.