REVISITING THE QUIET LIFE HYPOTHESIS IN BANKING USING NONPARAMETRIC TECHNIQUES

Rolf Färe,Emili Tortosa-Ausina,Joaquín Maudos,Shawna Grosskopf

doi:10.3846/16111699.2012.726929

Rolf Färe, Emili Tortosa-Ausina + Show 2 more

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https://doi.org/10.3846/16111699.2012.726929

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Abstract

Early studies testing the quiet life hypothesis in banking found strong evidence that banks in more concentrated markets exhibit lower cost efficiency levels. More recent studies have reexamined the issue in different contexts with mixed results. These approaches are based on stipulating a linear relationship between market power and efficiency in banking, which might be problematic, as suggested by the literature on efficiency analysis. We explore how bank cost efficiency measures are related to market power using flexible techniques, which are more consistent with those employed to measure efficiency in the first stage of the analysis. Our study focuses on the Spanish banking industry, which has been experiencing substantial change in the last few years, combining institutions with different ownership structures and business models. Results show that the relationship varies according to the level of market power, the component of efficiency evaluated (cost, technical or allocative) and the type of banking firm (commercial bank or savings bank), suggesting that the quiet life might be a reality only for some financial institutions.

Highlights

Over the last twenty years, the changes and challenges faced by most banking industries worldwide have prompted a remarkable interest in analyzing several industrial organization topics in banking
Considering the entire banking industry (Fig. 1a), the median indicates that market power has been increasing over the sample period
This is a hypothesis which needs to be tested properly, the distribution of the Lerner index is stretching over the sample period, indicating that the new competitive and regulatory environment has had a relatively strong impact on market power

Summary

Introduction

Over the last twenty years, the changes and challenges faced by most banking industries worldwide have prompted a remarkable interest in analyzing several industrial organization topics in banking. As reviewed by Berger et al (2004), the early 1990s empirical banking studies analyzing the effects of concentration and competition were concerned about whether the traditional SCP paradigm held for the U.S banking industry. This literature is large, and despite the difficulties of summarizing results, most studies found that banks in more concentrated local markets – as measured by the Herfindal-Hirschman Index (HII), or n-firm concentration ratio (CRn) – charged higher rates on loans, and payed lower rates on retail deposits (Berger, Hannan 1989; Hannan 1991)

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