Market Competition and Bank Efficiency: A Post GFC Assessment of Australia and New Zealand

Abstract

Banking markets of Australia and New Zealand have become more concentrated for the period of 2003-15. This paper examines the relationship between market competition and bank efficiency in these two markets during this period. The Quiet Life Hypothesis (QLH) is tested to estimate relationship between market concentration, power, and bank efficiency. The selected period is also important to assess the impact of Global Financial Crisis 2008 (GFC-2008) on market competition and bank efficiency. Results find a positive impact of market power and concentration on profit efficiency whereas negative impact is found on cost efficiency in both markets during the study period. Moreover, capital adequacy ratio and loan losses are found to have negatively influenced the bank efficiency whereas interest rate, GDP per capita, loans to assets ratio, bank risk and size are positively related to efficiency. The GFC significantly affected the bank efficiency, market power and concentration in both economies during the crisis period. Overall, our findings do not support the existence of QLH in Australia and New Zealand. However, the negative consequences of increasing bank power may be a future challenge for both countries. The study can be useful for regulators and banks with respect to the changing market structure and GFC 2008.