Does market structure matter on banks’ profitability and stability? Emerging vs. advanced economies
TL;DR: In this paper, the authors investigate the effects of market structure on profitability and stability for banks in 40 emerging and advanced economies over 1999-2008 by incorporating the traditional structureconduct-performance (SCP) and relative-market-power (RMP) hypotheses.
Abstract: We empirically investigate the effects of market structure on profitability and stability for 1929 banks in 40 emerging and advanced economies over 1999–2008 by incorporating the traditional structure-conduct-performance (SCP) and relative-market-power (RMP) hypotheses. We observe that a greater market share leads to higher bank profitability being biased toward the RMP hypothesis in advanced economies, yet neither of the hypotheses is supported for profitability in emerging economies. The SCP appears to exert a destabilising effect on advanced banks, suggesting that a more concentrated banking system may be vulnerable to financial instability, however, the RMP seems to perform a stabilising effect in both economies. Evidence also highlights that profitability and stability increase with an increased interest-margin revenues in a less competitive environment for emerging markets. Overall, these results suggest that although policy measures to promote competition may dampen economic rent, excessive implementation may have an undesired destabilising impact on banks.
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TL;DR: In this article, a large sample of 5,749 commercial banks, covering over 40,000 observations over the time window 2005-2012, was used to find that efficiency in the use of intellectual capital positively affects the financial performance of US banks.
117 citations
Cites background from "Does market structure matter on ban..."
...Previous papers show that the profitability of a bank depends on both exogenous factors, such as macroeconomic conditions, bank taxation, deposit insurance regulation and banking market structure (among others, Demirgüç-Kunt and Huizinga, 1999; Albertazzi and Gambacorta, 2010; Mirzaei et al., 2013) and bank characteristics: size, capital ratio, business models and corporate governance structure (among others, Aebi et al....
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...…deposit insurance regulation and banking market structure (among others, Demirgüç-Kunt and Huizinga, 1999; Albertazzi and Gambacorta, 2010; Mirzaei et al., 2013) and bank characteristics: size, capital ratio, business models and corporate governance structure (among others, Aebi et al.,…...
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TL;DR: In this article, the authors examined the impact of access to finance and environmental financing on the financial performance of the banking sector globally, and found that for banks with total assets less than USD 2 billion, access-to- finance has a significantly positive impact on return to equity.
116 citations
TL;DR: This article identified three channels of contagion in banking during the 2007-2009 crisis for 54 economies and found evidence for these in 45 countries, including the US, UK, and Canada.
Abstract: Policy makers aim to avoid banking crises, and although they can to some extent control domestic conditions, internationally transmitted crises are difficult to tackle. This paper identifies international contagion in banking during the 2007–2009 crisis for 54 economies. We identify three channels of contagion – systematic, idiosyncratic and volatility – and find evidence for these in 45 countries. Banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion. The results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent, whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system. Thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises, reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy.
104 citations
TL;DR: In this paper, the authors investigate capital strength, credit risk, ownership structure, bank size, noninterest income, cost efficiency, off-balance sheet activities, liquidity as potential bank specific determinants as well as growth in gross domestic products, inflation as potential macroeconomic determinants of bank profitability by taking 25 commercial banks from Bangladesh for a period ranges from 2006 to 2013.
Abstract: This study attempts to investigate capital strength, credit risk, ownership structure, bank size, non-interest income, cost efficiency, off-balance sheet activities, liquidity as potential bank specific determinants as well as growth in gross domestic products, inflation as potential macroeconomic determinants of bank profitability by taking 25 commercial banks from Bangladesh for a period ranges from 2006 to 2013. Three different measures of profitability namely return on assets (ROA), net interest margin over total assets (NIM) and return on equity (ROE) are used in the study. The empirical findings suggest that capital strength (both regulatory capital and equity capital) and loan intensity has positive and significant impact on profitability. Results also show that cost efficiency and off-balance sheet activities have negative and significant impact on bank profitability. The impact of other variables is not uniform in respect of different measures of profitability. Non-interest income, credit risk and GGDP are found as important determinant for NIM. Size has a positive and significant impact on ROA. Finally inflation has a negative and significant impact on ROA and ROE.
88 citations
Cites methods from "Does market structure matter on ban..."
...By taking data from 1929 banks in 40 advanced and emerging economies for a period from 1999 to 2008 Mirzaei, Moore, and Liu (2013) empirically examine the effects of market structure on profitability by incorporating the relative-market-power (RMP) hypotheses and traditional structure-conduct-…...
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TL;DR: In this article, the authors investigated the determinants of bank profitability in the Syrian banking sector and found that all bank-specific determinants (liquidity risk, credit risk, bank size, and management efficiency) affect bank profitability significantly.
Abstract: This study investigates the determinants of bank profitability in the Syrian banking sector. It seeks to identify significant bank-specific, industry-specific, and macroeconomic determinants of bank profitability in Syria. We utilize the Generalized Method of Moments (GMM) technique on unbalanced panel data set the covers the period from 2004 until 2011. The empirical results reveal that profitability persists to a moderate extent. All bank-specific determinants (liquidity risk, credit risk, bank size, and management efficiency) with the exception of bank capital, affect bank profitability significantly. However, no evidence was found in support of the Structure Conduct Performance (SCP) hypothesis, since the concentration ratio found to have no impact on bank profitability. Finally, the study shows that macroeconomic variables (inflation rate and real gross domestic product growth rate) affect bank profitability significantly.
84 citations
Cites background from "Does market structure matter on ban..."
...In addition, Mirzaei, Moore, and Liu (2013) incorporate the traditional structure-conduct-performance (SCP) and relative-market-power (RMP) hypotheses in investigating the effect of market structure on profitability and stability for 1929 banks in 40 emerging and advanced economies over the period…...
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28 Apr 2021
TL;DR: In this article, the authors proposed a two-way error component regression model for estimating the likelihood of a particular item in a set of data points in a single-dimensional graph.
Abstract: Preface.1. Introduction.1.1 Panel Data: Some Examples.1.2 Why Should We Use Panel Data? Their Benefits and Limitations.Note.2. The One-way Error Component Regression Model.2.1 Introduction.2.2 The Fixed Effects Model.2.3 The Random Effects Model.2.4 Maximum Likelihood Estimation.2.5 Prediction.2.6 Examples.2.7 Selected Applications.2.8 Computational Note.Notes.Problems.3. The Two-way Error Component Regression Model.3.1 Introduction.3.2 The Fixed Effects Model.3.3 The Random Effects Model.3.4 Maximum Likelihood Estimation.3.5 Prediction.3.6 Examples.3.7 Selected Applications.Notes.Problems.4. Test of Hypotheses with Panel Data.4.1 Tests for Poolability of the Data.4.2 Tests for Individual and Time Effects.4.3 Hausman's Specification Test.4.4 Further Reading.Notes.Problems.5. Heteroskedasticity and Serial Correlation in the Error Component Model.5.1 Heteroskedasticity.5.2 Serial Correlation.Notes.Problems.6. Seemingly Unrelated Regressions with Error Components.6.1 The One-way Model.6.2 The Two-way Model.6.3 Applications and Extensions.Problems.7. Simultaneous Equations with Error Components.7.1 Single Equation Estimation.7.2 Empirical Example: Crime in North Carolina.7.3 System Estimation.7.4 The Hausman and Taylor Estimator.7.5 Empirical Example: Earnings Equation Using PSID Data.7.6 Extensions.Notes.Problems.8. Dynamic Panel Data Models.8.1 Introduction.8.2 The Arellano and Bond Estimator.8.3 The Arellano and Bover Estimator.8.4 The Ahn and Schmidt Moment Conditions.8.5 The Blundell and Bond System GMM Estimator.8.6 The Keane and Runkle Estimator.8.7 Further Developments.8.8 Empirical Example: Dynamic Demand for Cigarettes.8.9 Further Reading.Notes.Problems.9. Unbalanced Panel Data Models.9.1 Introduction.9.2 The Unbalanced One-way Error Component Model.9.3 Empirical Example: Hedonic Housing.9.4 The Unbalanced Two-way Error Component Model.9.5 Testing for Individual and Time Effects Using Unbalanced Panel Data.9.6 The Unbalanced Nested Error Component Model.Notes.Problems.10. Special Topics.10.1 Measurement Error and Panel Data.10.2 Rotating Panels.10.3 Pseudo-panels.10.4 Alternative Methods of Pooling Time Series of Cross-section Data.10.5 Spatial Panels.10.6 Short-run vs Long-run Estimates in Pooled Models.10.7 Heterogeneous Panels.Notes.Problems.11. Limited Dependent Variables and Panel Data.11.1 Fixed and Random Logit and Probit Models.11.2 Simulation Estimation of Limited Dependent Variable Models with Panel Data.11.3 Dynamic Panel Data Limited Dependent Variable Models.11.4 Selection Bias in Panel Data.11.5 Censored and Truncated Panel Data Models.11.6 Empirical Applications.11.7 Empirical Example: Nurses' Labor Supply.11.8 Further Reading.Notes.Problems.12. Nonstationary Panels.12.1 Introduction.12.2 Panel Unit Roots Tests Assuming Cross-sectional Independence.12.3 Panel Unit Roots Tests Allowing for Cross-sectional Dependence.12.4 Spurious Regression in Panel Data.12.5 Panel Cointegration Tests.12.6 Estimation and Inference in Panel Cointegration Models.12.7 Empirical Example: Purchasing Power Parity.12.8 Further Reading.Notes.Problems.References.Index.
10,363 citations
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TL;DR: Demirguc-Kunt and Huizinga as discussed by the authors used bank data for 80 countries for 1988-95 and found that differences in interest margins and bank profitability reflect various determinants: bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors.
Abstract: Differences in interest margins reflect differences in bank characteristics, macroeconomic conditions, existing financial structure and taxation, regulation, and other institutional factors. Using bank data for 80 countries for 1988-95, Demirguc-Kunt and Huizinga show that differences in interest margins and bank profitability reflect various determinants: Bank characteristics. Macroeconomic conditions. Explicit and implicit bank taxes. Regulation of deposit insurance. General financial structure. Several underlying legal and institutional indicators. Controlling for differences in bank activity, leverage, and the macroeconomic environment, they find (among other things) that: Banks in countries with a more competitive banking sector-where banking assets constitute a larger share of GDP-have smaller margins and are less profitable. The bank concentration ratio also affects bank profitability; larger banks tend to have higher margins. Well-capitalized banks have higher net interest margins and are more profitable. This is consistent with the fact that banks with higher capital ratios have a lower cost of funding because of lower prospective bankruptcy costs. Differences in a bank's activity mix affect spread and profitability. Banks with relatively high noninterest-earning assets are less profitable. Also, banks that rely largely on deposits for their funding are less profitable, as deposits require more branching and other expenses. Similarly, variations in overhead and other operating costs are reflected in variations in bank interest margins, as banks pass their operating costs (including the corporate tax burden) on to their depositors and lenders. In developing countries foreign banks have greater margins and profits than domestic banks. In industrial countries, the opposite is true. Macroeconomic factors also explain variation in interest margins. Inflation is associated with higher realized interest margins and greater profitability. Inflation brings higher costs-more transactions and generally more extensive branch networks-and also more income from bank float. Bank income increases more with inflation than bank costs do. There is evidence that the corporate tax burden is fully passed on to bank customers in poor and rich countries alike. Legal and institutional differences matter. Indicators of better contract enforcement, efficiency in the legal system, and lack of corruption are associated with lower realized interest margins and lower profitability. This paper - a product of the Development Research Group - is part of a larger effort in the group to study bank efficiency.
2,029 citations
Posted Content•
TL;DR: In this article, the authors examined the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis.
Abstract: The aim of this study is to examine the effect of bank-specific, industry-specific and macroeconomic determinants of bank profitability, using an empirical framework that incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. To account for profit persistence, we apply a GMM technique to a panel of Greek banks that covers the period 1985-2001. The estimation results show that profitability persists to a moderate extent, indicating that departures from perfectly competitive market structures may not be that large. All bank-specific determinants, with the exception of size, affect bank profitability significantly in the anticipated way. However, no evidence is found in support of the SCP hypothesis. Finally, the business cycle has a positive, albeit asymmetric effect on bank profitability, being significant only in the upper phase of the cycle.
1,929 citations
TL;DR: In a dynamic model of moral hazard, competition can undermine prudent bank behavior as mentioned in this paper, thus encouraging gambling, which can be mitigated by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values.
Abstract: In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.
1,446 citations
TL;DR: This paper showed that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators.
Abstract: Using bank-level data for 80 countries in the year's 1988-95, this article shows that differences in interest margins and bank profitability reflect a variety of determinants: bank characteristics, macroeconomic conditions, explicit and implicit bank taxation, deposit insurance regulation, overall financial structure, and underlying legal and institutional indicators. A larger ratio of bank assets to gross domestic product and a lower market concentration ratio lead to lower margins and profits, controlling for differences in bank activity, leverage, and the macroeconomic environment. Foreign banks have higher margins and profits than domestic banks in developing countries, while the opposite holds in industrial countries. Also, there is evidence that the corporate tax burden is fully passed onto bank customers, while higher reserve requirements are not, especially in developing countries.
1,426 citations