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Profitability and Competition in Banking Markets: An Aggregative Cross Country Approach
Abstract
The relationship between profitability and competition in banking markets has been the focus of discussion for some time. Using the OECD Bank Profitability data base, the paper attempts to advance our understanding of the following issues on which no unanimity exists in the literature. First, in order to assess banking market structures we employ the Lerner monopoly index as a proxy for market power. Second, our international database allows us to provide some insights into the nature of competition on a global basis. Our research points to its market power reducing effects. Third, as for risk we suggest a measure that is more in tune with the concept used in the Value-at-Risk-approaches than the contributions in the literature. The volatility of gross bank-income appears to capture the uncertainties of banking; it exerts a consistently positive influence on bank profitability and margins.
... One of the important determinants in income statement of banks can be considered a non-interest income/assets ratio. Gischer and Juttner (2001), found that fee income generating financial institutions influences inversely related with bank"s profitability. ...
... One of the important determinants in the income statement in banks can be considered a non-interest income ratio. Gischer and Juttner (2001) find that a fee income, generated by financial institutions, influences inversely bank"s profitability. ...
... Y. Tan & Anchor, 2017). However, Demirguc-Kunt and Huizinga (1999), Gischer and Jüttner (2001), and Tan (2016) have shown that revenue diversification has a detrimental impact on bank profitability since conventional interest-earning activities may encounter less competition than fee-earning activities. The evidence for a link between income diversification and bank profitability is contradictory. ...
The purpose of this study is to examine the impact of ownership concentration on the performance of Indian commercial banks. A panel data approach has been used in this study. Particularly, the effect estimation and GMM has been used in this study to examine the relationship between ownership concentration and bank performance during 2009–2010 to 2018–2019. The findings reveal that the largest shareholder impacts the bank’s performance positively. The results are robust across the various proxies of bank performance, and sub-samples based on ownership and size of the bank. The present study may be useful for Indian banking regulators and investors to understand the impact of ownership concentration on bank performance.
... (Jiang et al., 2003) find positive impacts of income diversification on performance. However, Demirgüç-Kunt and Huizinga (1999) and Gischer and Juttner (2001) suggest a negative association between income diversification and performance. This result has been explained by the fact that there is a strong competition for generating freeincome compared to traditional interest generation activity. ...
This study develops and estimates a dynamic panel model to examine the simultaneous relationship between capital regulations and bank risk-taking in the Bangladeshi banking sector. Furthermore, the study investigates the impact of capital regulations and bank risk-taking on performance. The study investigates on 30 commercial banks of Bangladesh over the period 2002-2016 using two-step system GMM estimator. The study also uses two-stage least squares regression to check the robustness of the findings. The empirical evidence is found showing the significant negative association between capital regulations and risk-taking simultaneously. The study also finds evidence that there is a significant positive impact of capital regulations on bank performance. In contrast, the findings show that bank risk-taking has significant negative impacts on performance. The study expects that the results of this study will add value to the existing literature and will be significant for the future researcher and policymaker to decide in this regard.
... This further promotes the bank profitability (Tan & Floros, 2012a;Jiang, Tang, Law, & Sze, 2003, among others). On the other hand, few empirical studies find that there is a negative impact of bank diversification on bank profitability due to the fact that stronger competition in the non-interest income activities compared to the traditional interest-generating activities reduces bank profit margin (Demirguc-Kunt & Huizinga, 1999;Gischer & Juttner, 2001;among others). ...
... Diversified banks are earning more income investigated by (Jiang, Tang, Law, & Sze, 2003a). Gischer and Jüttner (2001)explored that the institutes, which provide free services actually exert an adverse influence on banks performance. The businesses which are dealing in trades of derivatives, credit cards suppliers are earning more particularly at worldwide level than those that earn through interest revenue. ...
As profitability is a comparative measure that describes the associations of total amount of profit with different factors. Thisstudy examines the influence of commercial banks determinants on the performance of commercial banks in Pakistan over the time period from 2004-2010. Consistency in performance is the basic reason for smooth running and presence of every financial institution.Profitability is the most significant and consistent indicator as it contributes huge amount of profitthat ultimately impacts its performance positively. The commercial bank’s profitability is found out by the return on equity (ROE) and net-interest margin(NIM). Result indicates that the capital strength of a bank is utmost significance in affecting its performance, as a well-capitalized bank is observed to be less risky and such edge lead to high profitability. The assets quality, measured by the loans loss provisions, affects the performance of the banks positively and bank size as deposit indicates direct association with profitability as large banks earn more profit instead of small banks. Inflation and NIGI affects the bank’s profitability inversely as increase inflation affects banks cost that increased and its earning main source is its fee that it charge on its services but free services without any charges decrease in gross income that lead a reduction in profit. This study is important and worthwhile for all commercial banks mangers regarding performance decisions of banks. As the development of the banking sector depends profoundly on strong decision making that leads to the efficiency and performance
This paper empirically examines an important research question of whether changes in bank competition have influenced the profitability pattern of Indian banking. Using the two-step system generalized method of moments, we examine the implications of bank deregulation measures on bank profitability for a set of 70 commercial banks in India over the period 1997 to 2017. The findings show that a higher degree of bank competition that has led to the contraction of the interest rates margin has negatively affected bank profitability. The findings also suggest important policy implications for the Indian banking industry.
In this study, we assess the main determinants of banks' profitability in Portugal over the period 2015–2018. We divide the factors that can influence bank profitability into several groups: management quality, credit quality, capital adequacy, liquidity (internal bank factors), and GDP growth (an external factor). The panel dataset is composed of annual report data for the 18 major banks operating in Portugal, representing about 98% of the Portuguese banking product. Profitability has been a persistent challenge for banks since the global financial crisis. Moreover, the Portuguese banking system had been facing several structural problems, which makes this topic particularly relevant. The profitability proxy used is the return on equity (ROE). The empirical strategy followed was pooled OLS. Variables relevant for explaining Portuguese banks' profitability are capital adequacy, liquidity and credit risk. As expected, the results show that capital adequacy (TIER 1) and credit quality (CVCT) have a negative and significant impact on banks' profitability, whereas liquidity (RAL) has a positive impact.
Academic studies of Bangladeshi Private Commercial Banks (PCBs) have identified issues of Corporate Governance relating to ‘crony capitalism’ and political influence. The thesis combines quantitative and qualitative methods. The research employs conventional econometric panel estimation and a novel method of estimating efficiency using a non-parametric bootstrapping technology. The results reveal significant performance differences. To understand the causes underlying the differences in revenue efficiency and profitability, multiple lenses from theories of Corporate Governance are adopted to design semi-structured interviews. Twenty in-depth interviews from a sample of banks, both managers and board members and industry stakeholders are supplemented with documentary analysis.
The quantitative findings reveal a performance gap between 1st Generation PCBs and 2nd and 3rd Generation PCBs in terms of Efficiency and Profitability. 1st Gen PCBs perform worst whereas there is no statistical difference between Gen 2 and Gen 3 PCBs. Moreover, there is no sign of catch-up or improvement for the 1st Generation PCBs. The research demonstrates that an increasing amount of 1st Generation banks’ Non Performing Loans is the main reason for this performance gap.
The interview data relate the performance gaps to inadequate Corporate Governance. The research identifies family-dominated boards that have encouraged crony capitalism and featherbedding of employees resulting in excessive Non Performing Loans and higher overhead costs. Also, these 1st Generation banks are excessively large in terms of employees, rural branches, and remittance earnings leading to a culture of invulnerability to takeover.
This study analyzed the relationship between credit risk and the efficiency of Brazilian credit unions in the period from 2008 to 2017. The two-stage data envelopment analysis model was used to obtain efficiency scores, with the analysis of a Tobit model in the second stage. Specialists were consulted for the construction and validation of efficiency scores, which is a contribution of this study in relation to the others. It was found that the higher the credit risk, the lower the efficiency scores, and that credit unions that manage to maintain their continuity in the market and diversify their products had higher efficiency scores, consequently generating greater benefits to their members. Additionally, cooperatives must pay attention to the number of service points and periods of economic recession. The increase in the number of service points reduces efficiency scores. When considering the period of Brazilian economic downturn, measured from 2015 to 2017, there was a negative impact on the average efficiency scores of the cooperatives. As a limitation, it is reported that the results are derived from the inputs and outputs selected from accounting and financial information, and it is suggested that new variables related to the social dimension of cooperatives be incorporated into other studies to assess the overall efficiency of Brazilian credit unions.
Resumo Este estudo analisa a relação entre o risco de crédito e a eficiência das cooperativas de crédito brasileiras no período de 2008 a 2017. Utilizou-se o modelo de Data Envelopment Analysis em dois estágios para a obtenção dos escores de eficiência, com a análise de um modelo Tobit no segundo estágio. Foram consultados especialistas para a construção e a validação dos escores de eficiência, o que é uma contribuição desse estudo em relação aos demais. Constatou-se que, quanto maior o risco de crédito, menores os escores de eficiência. De igual modo, viu-se que as cooperativas de crédito que conseguem manter sua continuidade no mercado e diversificam seus produtos tiveram maiores escores de eficiência e, por consequência, geraram mais benefícios aos associados. Adicionalmente, as cooperativas devem se atentar no número de pontos de atendimentos e em períodos de recessão econômica. O aumento do número de pontos de atendimento reduz os escores de eficiência. Considerando o período de retração econômica brasileira medido no período de 2015 a 2017, verificou-se um impacto negativo nos escores de eficiência médios das cooperativas. Como limitação, os resultados são decorrentes de inputs e outputs selecionados de informações contábeis e financeiras, de modo que se sugere que novas variáveis relacionadas à dimensão social das cooperativas sejam incorporadas em outros estudos a fim de avaliar a eficiência global das cooperativas de crédito brasileiras.
The primary purpose of this study is to investigate the internal determinants of commercial and participation banks operated profitability in Turkey over the time from 2010Q1 to 2018Q4 and recommend strategies for the robust banking system regarding The Turkish bank system. Within this context, quarterly data of 20 commercial and three participation banks were analyzed by using the fixed panel regression model. The bank performance is measured by using return on asset (ROA) and return on equity (ROE). As a result, it was found that size has a negative and significant impact on participation banks ROE and commercial banks both ROE and ROA. It was also concluded that credit risk (CR) has an adverse and significant effect on participation banks. However, non-interest income to the total asset (OFFBS) has a positive and significant impact on all bank profitability. The results also showed that the coefficient of capital adequacy for participation bank ROA is positive and significant. At the same time, its effect is negative and significant for commercial bank ROE and participation bank ROE. Finally, liquidity management is positively related to participation bank ROE. Concerning the results of the model, the commercial and participation bank profitability are associated with the bank-specific determinants. Because of this situation, bank managements and policymakers should initially focus on improving bank management, the lending policy and banking activities so the bank performance will continue in a crisis period.
This paper examines the impact of loan loss provisions of the banks on the performance of the banks operating in Pakistan. Moreover the other factors that affect the banking profitability have been discussed in this study. Our results show that the loan loss provision of the banks is of paramount importance in affecting its profitability. A well-managed bank is perceived to be of lower loan loss provision and such an advantage will be translated into higher profitability. In addition, banks advances and deposits which represent the vital role for the determination of banking profitability. Finally, with regard to non financial variable, political instability in the previous period has more significant effect on the present banks profitability rather than the political instability at present period.
Several rounds of banking reforms in China have aimed to increase the competitive condition and further enhance stability in the Chinese banking sector, while the joint effects of competition and risk-taking behaviour on the profitability in the banking sector have not been studied well enough so far in the literature. The current study contributes to the empirical literature by testing the impacts of risk and competition on profitability in the Chinese banking industry (state-owned, joint-stock and city commercial banks) over the period 2003–2011 under a one-step Generalized Method of Moments (GMM) system estimator. The results do not show any robust finding with regards to the impacts of competition and risk on bank profitability, while it is found that Chinese bank profitability is affected by taxation, overhead cost, labour productivity and inflation. The study provides policy implications to the Chinese banking industry and different ownership types of Chinese commercial banks.
Bu tez çalışmasında Türkiye’de sermaye piyasalarında faaliyet gösteren aracı kurumlar için, piyasa yapısı ve aracı kurum performansı arasındaki ilişkiye dair hipotezler, aracı kurum etkinliği için doğrudan bir ölçüt kullanılarak test edilmiştir. Diğer bir ifade ile çalışmamızda aracı kurumların karlılığının, piyasa gücü mü yoksa etkinlik tarafından mı belirlendiği araştırılmıştır. Aracı kurum etkinliğinin doğrudan hesaplanmasında stokastik sınır yaklaşımı kullanılmış; bu amaçla bir translog sınır maliyet fonksiyonu tahmin edilmiştir.
Çalışmada 104 aracı kuruma ait 2000-2003 yılları arasındaki veriler kullanılmıştır. Çalışma sonucunda temel olarak üç ana bulguya ulaşılmıştır: (1) Etkinliğin, ister piyasa payı ile temsil edilsin isterse doğrudan bir ölçüt kullanılarak ölçülsün, karlılığın belirleyenleri arasında yer almadığı, buna karşın karlılığın temel belirleyeninin piyasa yoğunlaşması olduğu gözlemlenmiştir. Yani tahmin sonuçlarının yapı-davranış-performans hipotezini desteklediği sonucuna ulaşılmıştır. (2) Hesaplanan etkinlik skorlarından, aracı kurumların ortalama etkinliklerinin 2000 yılından 2003 yılı sonuna kadar azalan bir hızda düştüğü görülmüştür. (3) Maliyet fonksiyonuna banka aracı kurumların etkisini ölçmek amacıyla konulan kukla değişkenin katsayısından banka aracı kurumlarının göreceli olarak daha yüksek maliyet koşullarında çalıştıkları gözlenmiştir.
Aracı kurumların karlılıklarının piyasa yoğunlaşması tarafından açıklanması, sektörde rekabeti engelleyici işbirliklerinin olabileceğini düşündürmektedir. Dolayısıyla, Sermaye Piyasası Kurulu’nun rekabeti artırıcı uygulamalara öncelik vermesinin çalışmamızın sonuçları ile uyumlu bir politika olduğu kanaatini taşımaktayız. Aracılık komisyonlarının 01.01.2006 tarihinden itibaren serbest bırakılmasının sektördeki rekabeti artıracağı düşünülmektedir.
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Factors Determining the Profitability of Brokerage Houses in Turkey
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In this thesis, the hypotheses on the relationship between market structure and performance are tested by using a direct measure of efficiency for the brokerage houses operating in Turkish capital markets. In other words, this study investigates whether the profitability of brokerage houses are determined by market power or efficiency. The stochastic frontier approach is employed to estimate the efficiency of brokerage houses directly, and this is accomplished by estimating a stochastic translog cost function.
The study uses data from 2000 to 2003 for 104 brokerage houses. The main findings of the study can be summarized in three points: (1) Efficiency is not among the determinants of profitability, regardless of whether it is proxied by market share or it is measured directly. Market concentration, on the other hand, is found to be one of the main determinants of profitability. (2) It is observed from the estimated efficiency scores of brokerage houses that the average efficiencies of brokerage houses decline at a decreasing rate from 2000 to 2003. (3) The dummy variable included in the cost function to asses the effect of bank-owned brokerage houses shows that the bank-owned brokerage houses operate under relatively high cost conditions.
The finding that the profitability of brokerage houses is explained by market concentration would indicate that there might be collusive behavior in the sector which prevents competition. Therefore, we think that the competition-enhancing policies implemented by the Capital Markets Board would be in consistent with the findings of our study. It is believed that freeing of brokerage commissions as of January 1, 2006 will increase competition in the sector.
Purpose
The purpose of this paper is to evaluate the determinants of bank profitability in China. It examines the effects of inflation on bank profitability, while controlling for comprehensive bank‐specific and industry‐specific variables.
Design/methodology/approach
The sample comprises a total of 101 banks (five state‐owned banks, 12 joint‐stock commercial banks and 84 city commercial banks). The period under consideration extends from 2003‐2009. The two step generalized methods of moments (GMM) estimators are applied.
Findings
Empirical results exhibit that there is a positive relationship between bank profitability, cost efficiency, banking sector development, stock market development and inflation in China. The authors report that low profitability can be explained by higher volume of non‐traditional activity and higher taxation. Moreover, the authors confirm that there is a competitive environment in the Chinese banking industry. Furthermore, the authors propose policy actions that should be taken to improve bank profitability in China.
Research limitations/implications
Further research can be conducted by investigating the profitability of numerous branches of all national banks and its determinants.
Practical implications
The findings of the current study have considerable policy relevance. First, Chinese banks should emphasize the improvement of labour management and training skills, the purpose of which is to increase their productivity and boost the profitability. Furthermore, the government should gradually continue to open the banking and stock market, as the development of the financial sector is helpful in increasing the banks' profitability in China.
Originality/value
Particular emphasis will be placed on the investigation into the effect of inflation on bank profitability while controlling for most comprehensive internal and external factors.
Using 7900 bank observations from 80 countries for the 1988–1995 period, this paper examines the extent and effect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.
Banking markets are becoming increasingly international through financial liberalization and general economic integration. Using bank-level data for 80 countries for 1988-95, the authors examine the extent of foreign ownership in national banking markets. They compare net interest margins, overhead, taxes paid, and profitability of foreign and domestic banks. The comparative functions of foreign banks and domestic banks is very differentin developing and industrial countries, possibly because of a different customer base, different bank procedures, and different regulatory and tax regimes. In developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments than do domestic banks. In industrial countries it is the domestic banks that have greater profits, higher interest margins, and higher tax payments. It is common to read, in the literature on foreign banking, that the entry of foreign banks can make national banking markets more competitive, thereby forcing domestic banks to operate more efficiently. The authors show that increasing the foreign share of bank ownership does indeed reduce profitability and overhead expenses in domestically owned banks - so the general effect of foreign bank entry may be positive. Interestingly, the number of foreign entrants matters more than their market share, suggesting that they affect local bank competition more on entry rather than after gaining a substantial market share. These effects hold even when controlling for the fact that foreign banks may be attracted to markets with certain characteristics, such as low banking costs.
Using a large sample of cross-sectional data for 1998 of companies operating in the general insurance industry we attempt to shed some light on the issue of competition in this industry. Companies offering products and services in the general insurance market are believed to trade under very competitive conditions. In order to test this widely-held claim we investigate whether firms ’ pricing policies reflect competitive or monopolistic market features. Under competitive conditions companies are forced to pass on any increase in costs in prices and thus their revenues will rise pari passu should wages, underwriting costs or other expenses increase. By contrast, a firm operating under monopolistic competition responds to an increase in marginal and average costs by increasing price and reducing output, resulting in a less then complete pass-through in revenue; profit falls. Our study is the first, to our knowledge, to apply this research methodology to the general (casuality/liability) insurance industry. Firms in this industry generate revenue through underwriting of insurance risks and from investing their assets. As underwriting and capital markets are in general segmented (catastrophe bonds apart), our empirical approach is based on the insurance and portfolio behaviour of firms and not on an integrated view of both. Previous investigations of this kind have focussed on the banking industry. Contrary to widely held views we find that competition is less than perfect.
In this paper we utilise the Rosse-Panzar statistic to assess competitive conditions in major EC banking markets between 1986 and 1989. Although EC banking legislation has established relatively free access to member country banking systems in recent years, our results indicate no change in market conduct of banks between 1986 and 1989. The results suggest that banks in Germany, the United Kingdom, France and Spain earned revenues as if under conditions of monopolistic competition in the period. In the case of Italy, they are consistent with banks having earned revenues as if under monopoly or conjectural variations short-run oligopoly conditions. We interpret the results as indicative of a lack of integration in EC banking markets and they thus underline the importance of the Second Banking Directive, the associated supervisory arrangements, and the elimination of capital controls as to achieving full integration.
Two competing hypotheses with regard to market structure and performance are the traditional structure-conduct-performance (SCP) paradigm and the efficiency hypothesis. In this paper, results are presented for tests of both hypotheses with respect to the Spanish banking industry using pooled and annual data for the period 1986–1988. The results generally support the traditional SCP paradigm as an explanation for the market behaviour of Spanish banks and this suggests that further concentration in the Spanish banking market, currently being encouraged by the government and the Bank of Spain, is likely to unambiguously decrease the level of competition in the system and cannot be justified on efficiency grounds.
In order to assess the effect of EMU on market conditions for banks based in countries which adopt the Single Currency, we use the H indicator suggested by Panzar and Rosse (Panzar, J.C., Rosse, J.N., 1987. Journal of Industrial Economics 35, 443–456). Our contribution is to assess results separately for large and small banks, and for interest income and total income as a dependent variable. From a panel of banks over the period 1992–1996, we provide evidence that the behavior of large banks was not fully competitive as compared to the US. Regarding small banks, the level of competition appears to be even lower, especially in France and Germany.
This paper studies the determinants of bank net interest margins (NIMs) in six selected European countries and the US during the period 1988–1995 for a sample of 614 banks. We apply the Ho and Saunders model (Ho, T., Saunders, A., 1981. The determinants of bank interest margins: theory and empirical evidence. Journal of Financial and Quantitative Analyses 16, 581–600) to a multicountry setting and decompose bank margins into a regulatory component, a market structure component and a risk premium component. The regulatory components in the form of interest-rate restrictions on deposits, reserve requirements and capital-to-asset ratios have a significant impact on banks NIMs. The empirical results suggest an important policy trade-off between assuring bank solvency—high capital-to-asset ratios—and lowering the cost of financial services to consumers—low NIMs. The more segmented or restricted the banking system—both geographically and by activity—the larger appears to be the monopoly power of existing banks, and the higher their spreads. Macro interest-rate volatility was found to have a significant impact on bank NIMs; this suggests that macro policies consistent with reduced interest-rate volatility could have a positive effect in reducing bank margins.
This paper enters the debate between market-power and efficient-structure explanations of the profit-structure relationship in banking by including direct measures of X-efficiency and scale efficiency in the analysis. Structural models of two market-power hypotheses and two efficient-structure hypotheses are expressed in testable reduced form profit equations. This methodology is applied to thirty cross-sections of 1980s banking data. These data are somewhat consistent with one of the market-power and one of the efficient-structure hypotheses. However, none of the hypotheses are overwhelmingly important in explaining bank profits, suggesting that alternative theories be pursued. Copyright 1995 by Ohio State University Press.
This paper presents empirical assessments of the competitiveness in the Canadian banking, trust company, and mortgage company industries, which support the view that parts of Canada's financial system exhibit characteristics of contestability. Since asset concentrations in Canada's financial system do not seem to be decreasing, and since it has long been believed that financial industry concentration impairs competitiveness, making such assessments seems worthwhile. The authors use a nonstructural estimation technique to evaluate the elasticity of total revenues with respect to changes in input prices. The significantly positive values of the elasticity measure indicate that Canada's financial system does not exhibit monopoly power.
This paper develops a very general test for "monopoly." Using standard comparative statics analysis, the authors derive testable restrictions on the firm's reduced-form revenue equation which must be satisfied by any profit-maximizing firm whose choices are not affected by either strategic interactions or the threat of entry. For such an unfettered monopolist, the sum of the factor price elasticities of the reduced-form revenue equation must be nonpositive. The set of interesting alternative hypotheses is not empty. The authors develop simple models of oligopolistic, competitive, and monopolistically-competitive markets for which this test statistic may take on positive values. Copyright 1987 by Blackwell Publishing Ltd.
Econometric Models and Economic Forecasts
- R S Pindyck
- D L Rubinfeld
Pindyck, R.S. and D. L. Rubinfeld, 1991, Econometric Models and Economic
Forecasts, 3 rd ed., McGraw-Hill, New York
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