Bank Market Power Research Articles

Financial fragmentation and SMEs’ access to finance

This paper focuses on the impact of financial fragmentation on small and medium enterprises’ (SMEs) access to finance. We combine country-level data on financial fragmentation and the ECB’s SAFE (Survey on the Access to Finance of Enterprises) data for 12 European Union (EU) countries over 2009–2016. Our findings indicate that an increase in financial fragmentation not only raises the probability of all firms to be rationed but also to be charged higher loan rates; in addition, it increases the likelihood of borrower discouragement and it impairs firms’ perceptions of the future availability of bank funds. Less creditworthy firms are even more likely to become credit rationed, suggesting a flight to quality effect in lending. However, our study also documents a potential adverse effect of increasing bank market power resulting from greater integration. This suggests that financial integration could impair firms’ financing, if not accompanied by policy initiatives aimed at maintaining an optimal level of competition in the banking sector.

Banking concentration and financial development in the MENA region

PurposeBank consolidations in many Middle East and North Africa (MENA) countries have been proceeding at a rapid pace, leading to a decline in the number of banks and an increase in market concentration. This may raise concerns regarding the impact of such increase in concentration on the behaviour of banks and consequently on the financial development. Therefore, this study aims to examine the impact of concentration on the financial development of MENA region.Design/methodology/approachThe study adopts fully modified ordinary least squares model on a heterogeneous, non-stationary, cointegrated panel data set. The exploited panel is formed of 15 MENA countries and covers the period 1996–2014.FindingsThe empirical results show that concentration per se is not harmful for financial development. Nevertheless, concentration combined with bank market power may deteriorate the development of MENA financial systems.Originality/valueIn addition to considering an understudied region, the research presents very important findings, which suggest that if banks obtain market power, an increase in concentration following a wave of bank mergers, could weaken the financial development.

Bank competition, concentration and EU SME cost of debt

Despite the plentiful debate on the effects of bank competition on SME access to finance and growth, only few studies have explored the impacts on SME cost of debt. This study examines how bank market power affects the credit costs of SMEs by using unique matched SME-bank data from 17 EU countries. We show that bank market power reduces the cost of debt for SMEs. Such a favorable effect is stronger for SMEs that are less informationally transparent, and in the economies subject to less credit information depth and business extent of disclosure. These findings support the Information-based Hypothesis, whereby market power motivates banks to invest in soft information acquisition and to build lending relationships to reduce information costs. In addition, we show that despite the favorable effects of relationship lending brought by bank market power, SME credit conditions worsen in a more concentrated banking market.

Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.

Carbon dioxide emissions and the finance curse

Abstract The paper empirically examines whether a country's financial sector influences carbon dioxide (CO2) emissions for a sample of advanced and developing countries during the period 1989–2013. It first considers financial sector development and finds that a better functioning of financial system raises and then reduces CO2 emissions with financial deepening. We then investigate whether financial structure, i.e., the dominance of stock markets over banks, matters and find that a more market-led (bank-led) financial system alleviates (enhances) but eventually aggravates (lowers) CO2 emissions. We also check for market power in banking and show that CO2 emissions decrease with bank market power up to a threshold level beyond which a less competitive, more concentrated banking sector raises CO2 emissions. Next, we examine whether there are differences between household credit and enterprise credit and find irrelevance of credit composition. Bank lending to households or enterprises raises CO2 emissions up to a threshold above which more lending is associated with less CO2 emissions. It is also found that these effects work in part through the green technology channel. Our data thus suggest that financial reforms toward development of a more competitive, less concentrated bank-based financial system are conducive to better environmental quality.

Diversification strategy and bank market power: does foreign ownership matter?

ABSTRACT This paper examines whether bank diversification strategy enhances bank market power and how foreign ownership affects this relationship. Using data from Chinese commercial banks for the period 2007–2018, we find that diversification strategy has a positive impact on bank market power and foreign ownership reinforces this effect. Results hold for bank income, non-interest income and asset diversification strategies.

Competition and Financial Effects between Islamic and Conventional Banking

This study discusses a comprehensive analysis of the effect of competition and financial effects between Islamic and conventional banks. This study conducts in Asian countries i.e., Indonesia, Malaysia, Singapore, Thailand, Philippines, Brunei. The first step, introducing a descriptive study mapping that analyzes the characteristics the main among the sharia and conventional banking sectors. Then in the second step, the competitiveness level of Islamic and conventional banks is measured using the Lerner index model. The Lerner index is a model of the implications of the market power of Islamic and conventional banks on overall financial stability in Asian countries (Indonesia, Malaysia, Singapore, Thailand, Philippines, Brunei). This study also discusses the relationship between competition and performance in the banking system in Asian countries. A study of a competition in the banking industries relate the reasons. First about the level of market power and its effect of financial stability. Second about the analyze of competition that affect the performance and efficiency of banks.

On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach

This paper investigates the dynamic causal relationship between revenue diversification and bank market power using a broad sample of commercial banks from 17 Middle Eastern and North African (MENA) countries over the period 1993–2014. To do so, we employ the panel vector autoregression (PVAR) approach in a generalized method of moments (GMM) framework. Moreover, we use the impulse response functions (IRFs) tool to better understand the reaction of bank market power aftershocks on revenue diversification and vice-versa. Finally, we supplement our analysis by the forecast error variance decompositions (FEVds) of our variables. Overall, the results show that the level of bank market power declines in response to positive revenue diversification shocks. Conversely, banks with a higher level of market power get more involved in non-traditional activities.

Financial Sector Transparency, Financial Crises and Market Power: A Cross-Country Evidence

The study investigates how financial sector transparency moderates the influence of financial crises on bank market power across seventy-five economies between 2004 and 2014. Employing two-step dynamic system generalized method of moments the study shows that while public sector-led financial sector transparency reduces bank market power, private sector-led financial sector transparency promotes bank market power given that private sector-led transparency gives financial cost advantage to financially sound banks to solidify the market power and dominance. Similarly, while financial crises reduce the market power of banks implying that during financial crises banks lose their market power, financial sector transparency promotes the negative effect of financial crises on bank market power. This implies that during financial crises, financial sector transparency whether enforced through private or public sector, boosts the weakening effect of financial crises on bank market power. These findings imply that regulators can rely on financial transparency to tame bank market power to enhance banking competitiveness. The findings and results are consistent even when country, time and continental effects are controlled for.

Lend Me a Hand - Bank Market Power and Firm Creation in Innovative Industries

This paper studies how bank market power affects firm creation in innovative industries. Theoretically, I show that the effect of bank market power is ambiguous. I exploit a 2012 policy intervention in Italy, designed to foster firm creation in innovative industries through public bank guarantees. The policy increased firm creation in innovative industries by 50%, but the increase is more than halved in provinces where banking competition is weaker. I propose a new way to parsimoniously measure bank market power and competition at the local level, and I use both a difference-in-difference-in-differences (DDD) design and an Instrumental Variables (IV) approach on a dataset of newly incorporated firms in Italy between 2010 and 2015. I document that what drives the result is a weaker increase in the amount of guaranteed credit extended to innovative industries by banks. I conclude that banking competition is an important factor for the design of policies to foster innovative firm creation.

Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.

Government Intervention and Bank Market Power: Lessons from the Global Financial Crisis for the COVID-19 Crisis

The COVID-19 pandemic could result in large government interventions in the banking industry. To shed light on the possible consequences on market power, we rely on the experience of the global financial crisis and exploit granular data on government interventions in more than 800 banks across 27 countries between 2007 and 2017. For identification, we use a multivariate matching method. We find that intervened banks experience a significant decline in market power with respect to matched non-intervened banks. This effect is more pronounced for larger and longer interventions and is driven by a rise in costs-mostly because of higher loan impairment charges-which is not followed by a similar increase in prices.

The Effect of Bank Heterogeneity on the Interest Rate Channel in Lebanon

Abstract The effect of bank heterogeneity on the transmission of monetary policy is capturing an increasing attention, and the debate on how bank specific characteristics may determine their reaction to monetary actions is mounting. This paper participates in this flow of research by studying the reaction of 40 banks operating in Lebanon between 1994 and 2017, to a change in lending interest rate, taking into consideration: size, market power, capitalisation, credit risk, and liquidity. The empirical results show that the impact of a change in interest rate on loan supply depends on bank market power and bank liquidity only. Consequently, interest rate channel in Lebanon operates through banks with high market power and banks with high liquidity stocks.

The effect of bank market power on economic growth in Africa: The role of institutions

We provide empirical investigations into the role of political institutions in the bank market power-economic growth nexus using country-level data from 44 African countries from 2002 to 2015. We e...

Financial integration, competition and bank efficiency: evidence from Africa’s sub-regional markets

This paper examines the convergence properties as well as the causal nexus between bank competition and efficiency in five regional economic communities of Africa over the 2007–2014 period. We estimate bank market power, cost and profit efficiency using the stochastic frontier analysis approach and employ β and σ convergence tests to assess the relative speed of banking convergence in Africa and the five sub-regional markets over the 2007–2014 period using data from 405 banks from 47 African countries. We further examine the causal nexus between bank competition and efficiency in these markets using Granger-type causality tests. The results show a steady rise in bank competition and efficiency in Africa and the five sub-regional markets overtime. The gradual convergence of bank competition and efficiency in the selected markets also reflects the benefits of financial integration in emerging markets. The results also support the quiet life hypothesis in Africa, especially in the East African Community, and reject the quiet life hypothesis in the AMU and ECCAS banking markets. We further found evidence of the efficient structure hypothesis in Africa, especially in the Arab Maghreb Union and Southern African Development Community.

Does banking market power matter on financial stability?

Does banking market power matter on financial stability?

Bank market power and SME finance: Firm-bank evidence from European countries

Using unique matched data on SME-bank relationships from 19 European countries, we examine the effects of bank-level market power on SME finance. We show novel evidence that bank market power at disaggregate level reduces SMEs’ access to bank finance and worsens their credit constraints. Whilst, banking market concentration improves credit supply to SMEs. The unfavourable market power effect is stronger for SMEs who are more informationally opaque, riskier and more dependent on external finance. We also show supporting evidence on Information-based Hypothesis where with greater market power, banks are more likely to engage in relationship lending.

Market power and stability of financial institutions: evidence from the Italian banking sector

Purpose This paper aims to explore the relationship between bank market power and stability of financial institutions in Italy between 2001 and 2012. The authors first test the existence of a U-shaped relationship between market power and financial stability. Second, they regress the market share indicator on bank risk-taking to underline whether financial stability is affected by increasing or decreasing the market power of banks. Third, they explore whether this relationship is affected by the size, level of capitalization and credit insolvency of banks. Design/methodology/approach Relying on highly territorially disaggregated data at labor market areas level, the authors estimate the impact of bank market power and other explanatory variables on a proxy of risk taking behavior such as the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Bank market power is taken into account through an individual measure based on loans. Financial stability is calculated through the Z-score. The authors use, as risk-taking measure, the stability inefficiency whose estimation approach is the stochastic frontier analysis. Findings The empirical evidence shows that the inefficiency of financial stability is found to be U-shaped related with respect to the measure of market power. Bank size is an essential factor in explaining the relationship between bank market power and risk-taking. Cooperative banks have fewer incentives to gain market power to better perform in term of risks. The reform of the cooperative banks that took recently place in Italy is not supported by the data. Originality/value The relationship between bank market power and financial stability has been analyzed using a rich sample of cooperative, commercial and popular banks in Italy over the 2001-2012 period. The authors rely on labor market areas being sub-regional geographical areas where the bulk of the labor force lives and works. The paper investigates the market power-stability link considering both cooperative and non-cooperative banks. Indeed, specific attention has been paid on cooperative banks because of their mission in favor of the local community as only few studies, to the best of the authors’ knowledge, examine cooperative banking.

Bank Competition, Efficiency, and Stability in Macau

Macau has the uppermost population density and the fourth-highest GDP per capita in the world. Macau’s banking system is regarded as one of the most important indicators of Macau’s macroeconomic growth and stability during its transformation into a wealthy and modern metropolis. In this study, we use a sample of 26 banks to explore the relationship of bank competition, efficiency and stability in Macau from its return to China in 1999 to 2016. Our results demonstrate that bank competition does cause efficiency in Macau throughout the study period. We also find indications of a positive but not significant connection between bank market power and bank fragility including income volatility and insolvency risk. Moreover, this study finds no evidence that the size of operations proxied by total bank loans and total assets would impact bank efficiency, indicating that economies of scale or bank market share don’t necessarily bring about efficiency in Macau. Our evidence contributes to the literature by being the first to thoroughly examine the relation of bank competition, efficiency and stability in Macau. The findings provide meaningful implications to the practitioners and policymakers to make sound decisions accordingly, especially to closely monitor and maintain a proper level of competition in Macau’s banking sector.

A Macro-Level Account of Money and Credit to Explain Gendered Financialization

ABSTRACT The paper intervenes in the debate on macroeconomics, money, gender, and financialization. Generally, there is an omission in gender studies on gender-specific effects of monetary policy. Not only is there a blind-spot about the role of monetary policy in feminist political economy, there is equally a blind-spot in meso-level analysis which focus on the social construction of institutional mechanisms and the predatory market power of oligopolistic banks. Yet, monetary policy is neither neutral in the short-term nor long-term. Such policies have gender-differentiated effects on employment, income, consumption, savings which in turn have feed-back effects on economic growth. My intent is to focus on the changing role of monetary policy and highlight the omission in gender studies on financialization, as well as argue that the shift of the credit cycle to fictitious capital (future revenue) is one of the central explanatory variables in the predatory banking model of subprime lending. Yet, the financial crisis of 2007 did not usher in a normalisation of the credit and finance system. Exactly the opposite happened. Unconventional monetary policy continues to facilitate a credit system based on future claims which has gendered distributional effects, in the process increasing the wealth inequality on a global scale.