Market concentration, bank competition and bank efficiency in emerging Asian countries

Abstract

Developing Asian economies have emerged as a new growth pole in the world economy and have played a crucial role in balanced and sustainable global growth. These countries have experienced bank privatisation, interest rate deregulation and financial liberalisation, mergers and acquisitions (M&A), and foreign bank entry. They also have initiated significant financial reforms in banking system that aim to improve the quality of bank management and increase bank performance. This thesis examines the relationships between competition, concentration and X-efficiency in banking in six emerging Asian countries Bangladesh, India, Indonesia, Malaysia, the Philippines and Vietnam over the period 2005-12. First, we measure bank competition at industry level using the conduct parameter approach that is popular in recent empirical studies, and measure bank concentration using the conventional four-bank concentration ratio. The results showed that bank competition levels had a tendency to decrease for India and Indonesia, and to increase for Bangladesh, Malaysia and the Philippines. Degrees of competition in Vietnamese banking fluctuated frequently over a small range. Concentration levels in banking markets had a tendency to decrease for Bangladesh, India, Indonesia, and Vietnam; in contrast, the degree of bank market concentration had a tendency to increase slightly in Malaysia and the Philippines. The study also provides evidence to support the assumptions of the structure conduct performance (SCP) hypothesis: that there is a negative relationship between market concentration and bank competition across banking systems. Second, the study estimates bank X-efficiency using the stochastic frontier analysis (SFA) approach and measures degrees of bank competition at the bank level using the Lerner approach. It was found that banks in these countries are highly efficient and competitive. Finally, the research investigates the relationship between bank competition, market concentration and bank X-efficiency for the full sample and by country using both Tobit regression and two-stage least square regression. For the full sample, market concentration has a positive effect on X-efficiency, whereas competition has a negative effect on X-efficiency. Therefore, this study provides empirical evidence in support of the information generation hypothesis (IGH) but not the quiet life hypothesis (QLH). Moreover, the effect of bank size on X-efficiency is positive, whereas the effect of liquidity risk on X-efficiency is negative. Gross domestic product growth (GDPG) has a positive influence on X-efficiency; however, the effect of inflation on X-efficiency is not clear. By country, the QLH is supported for banking in Bangladesh and Indonesia. In contrast, this hypothesis is rejected and the IGH is supported for banking in India, Malaysia, the Philippines and Vietnam. The study makes three important contributions. First, this research empirically tested the QLH and the IGH in emerging Asian countries, along with the assumption of the SCP hypothesis of a negative relationship between competition and concentration. Second, the study provides new empirical evidence on the relationships between competition, market concentration and bank X-efficiency in six emerging Asian countries overall and by country. Third, the study has important policy implications for governments, policymakers and banks with respect to increasing X-efficiency of banking. For example, policy on M&A may encourage M&A of small-sized and weak financial banks as a means to improve their financial strength and soundness. Governments and policymakers are encouraged to allow increased foreign bank penetration and divestiture of state ownership in banking. Moreover, to increase X-efficiency, banks are motivated to diversify their activities and incomes, and establish better customer information systems. They consider also examining thoroughly sub-prime lending and relationship-based lending, try to increase their size and reduce their liquidity risk.

Date of Award	2015
Original language	English