Market structure, institutional framework and bank efficiency in ASEAN 5

Abstract

This paper aims to examine the mediating role of institutional framework on the effect of market concentration towards bank efficiency in the ASEAN-5. We adopt a two-stage methodology using the Slack-Based Measures Data Envelopment Analysis and the system Generalized Method of Moments, and focus on the post-Asian Financial Crisis period which saw major banking consolidation in the region. Our findings are consistent with economic theory which suggests that higher bank concentration reduces the efficiency level of commercial banks. Nevertheless, better institutional framework – as proxied by greater foreign ownership, political stability and regulatory quality – plays a significant mediating role to improve bank efficiency level even when the banking industry is highly concentrated. This presents an important policy implication in light of the ongoing trend of banking consolidation which results in higher industry concentration.