Bank market concentration and interest spreads: South Asian evidence

Abstract

PurposeThe purpose of this paper is to investigate whether any deviations in South Asian banks' interest margins can be attributed to market concentration (MC) after controlling for other bank‐specific factors and exogenous environmental influences.Design/methodology/approachThe paper employs an improved structural price‐concentration model with multiple definitions of market share (MS) covering loan and deposit markets. This model is estimated using generalized least squares method and random effect estimates are reported. The sample consists of 120 South Asian banks with a total of 1,226 bank‐year observations over 1992‐2005.FindingsThe findings suggest that no significant deviations in bank interest margins can be attributed to MC. Instead, only dominant South Asian banks with larger MSs are found to extract higher interest margins.Research limitations/implicationsThis paper suffers from three main limitations: first, due to data limitations the sample only consists of South Asian domestic commercial banks. Second, due to the lack of product‐specific interest rates the authors have to contend with approximated bank‐specific interest margins. Third, throughout the study, annual bank‐specific data are used due to lack of high‐frequency data.Practical implicationsThe regulators should closely monitor dominant banks with larger loan and deposit shares because these institutions operate with higher interest margins. Similarly, state‐owned banks (with relatively inefficient cost structures) should also draw regulatory attention for they extract higher interest margins, possibly, for survival.Originality/valueThe existing literature is extended by utilizing a pooled cross‐section and time series data model which controls for sample heterogeneity using proxies for cost structures, risk profiles and regulatory restrictions.