Lerner Index Research Articles

Empirical Measurement of Competition in the Thai Banking Industry

The degree of competition in the banking industry can be observed and measured by two approaches, structural and nonstructural. Based on these two approaches, there are various indicators, which are different factors and methods. This paper aims to provide calculations, determine a good indicator, and assess the competitive environment of the Thai banking industry. Specifically, there are four indicators—concentration ratio, Herfindahl–Hirschman Index, Lerner Index, and Panzar–Rosse H statistic—which are widely used to examine the efficiency and effectiveness of policies in the banking industry. The findings indicate that the Lerner Index, calculated by stochastic frontier analysis, is the most reliable indicator of the banking competition environment in Thailand. It has a range of 0.36 to 0.60 and an average value of 0.40. Furthermore, during the period of study, the degree of Thai banking competition had a tendency to increase over time, which reflects an increase in allocative efficiency of resources in the banking industry. This is in accordance with the Financial Sector Master Plan of the country. However, this result probably leads to instability of the financial system. Therefore, policy-makers should carefully regulate competition policy by considering the systematic risk of the banking system at the same time.

ЎЗБЕКИСТОН ТИЖОРАТ БАНКЛАРИ МОНОПОЛ КУЧИНИ ЛЕРНЕР ИНДЕКСИ АСОСИДА БАҲОЛАШ

In this article, the Lerner index was used to assess the monopoly power of Uzbek banks. The Lerner index was estimated by calculating marginal costs based on the translog function of total costs. Banks operating in Uzbekistan in 1999-2018 were selected for the analysis. The analysis was conducted over the years based on the form of ownership of banks. It has been empirically proven that the monopoly power of banks has decreased over time. According to the form of ownership, banks were analyzed by state banks, joint-stock commercial banks, private banks, and foreign banks. The analysis showed that the state-owned banks had more monopoly power, while the private banks to a limited extent. The monopoly power of indirectly state-owned banks declined over time, as well as the average Lerner index of foreign banks has also declined. However, the monopoly position of foreign banks has increased compared to banks with other forms of ownership.

Measuring multi-product banks’ market power using the Lerner index

Abstract The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on total assets as the single aggregate output factor. We show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold. Under these conditions, the aggregate Lerner index reduces to a weighted-average of the product-specific Lerner indices. We test the three conditions for a sample of U.S. banks covering the years 2011–2017. All three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate Lerner index, depending on the economic context. As a general solution, we propose using the always consistently aggregated weighted-average Lerner index whenever a composite Lerner index is needed.

CSR engagement and market structure: Evidence from listed banks

According to the established literature, banks undertake social investment to compensate for the benefits enjoyed by the society. At first glance, one could expect more involvement in corporate social responsibility (CSR) from banks that have greater monopolistic power. However, this perspective would differentiate between banks and non-financial firms, since the latter use CSR engagement as a competitive lever. Thus, it follows that greater market pressure boosts a firm’s CSR investments. This conundrum has triggered the present analysis which, after estimating a Lerner index and then running a system-GMM regression, verified the impact of a firm’s monopolistic competition based on three scores pertaining to the listed banks’ CSR commitment. Our results support the view that the level of social responsibility of the banks’ management is affected by their markup on price.

Market power and cost efficiency in the African banking industry

PurposeIn this study, we test the so-called “Quiet Life Hypothesis” (QLH), which postulates that banks with market power are less efficient.Design/methodology/approachWe employ instrumental variable Ordinary Least Squares, Fixed Effects, Tobit and Logistic regressions. The empirical evidence is based on a panel of 162 banks consisting of 42 African countries for the period 2001–2011. There is a two-step analytical procedure. First, we estimate Lerner indices and cost efficiency scores. Then, we regress cost efficiency scores on Lerner indices contingent on bank characteristics, market features and the unobserved heterogeneity.FindingsThe empirical evidence does not support the QLH because market power is positively associated with cost efficiency.Originality/valueOwing to data availability constraints, this is one of the few studies to test the QLH in African banking.

The effect of product market competition on stability and capital ratio of banks in Southeast Asian countries

This study analytically examines the effect of product market competition on the stability and bank capital ratio of Southeast Asian commercial banks. This paper use the sys-GMM dynamic panel data estimation technique in the study, based on data extracted from 63 unbalanced panels of commercial banks in ASEAN for the period 2009 to 2017, totaling 567 observations. The empirical findings reveal that the Lerner index has a positive and significant effect on stability at Malaysian and Singaporean banks. A negatively significant nexus between market competition and stability is reported for Indonesian and Thai banks. The competition–stability nexus shows no significant relationship at Filipino commercial banks. Further results show that product market competition has a positively significant influence on the capital ratio at banks in Malaysia, Singapore, Indonesia, and Thailand. By contrast, the nexus between product market competition and the capital ratio is negatively significant at banks in the Philippines. This empirical study has significant supervisory and regulatory implications in the ASEAN banking industry, especially in emerging and developing countries. The study provides support for the competition–stability view and suggests that banks in more competitive markets maintain a higher capital ratio in order to be able to absorb unexpected losses. The study gives credibility to the concept of a nexus between product market competition, stability, and the capital ratio using recent financial data from an emerging and developing economy perspective.

Bank competition and transmission of monetary policy

ABSTRACT This study investigates whether the transmission of monetary policy depends on the degree of competition in the banking sector. Applying an interacted panel VAR methodology consisting of a panel of 23 advanced economies, we find that GDP and credit respond less strongly to monetary policy shocks in economies where the bank market is more concentrated. We use the Lerner Index as a measure of banking competition and find evidence – albeit less clear – that monetary policy transmission is stronger when the banking sector is more competitive.

Market competition and corporate performance: empirical evidence from China listed banks with financial monopoly aspect

ABSTRACT Theorists and policy experts generally believe that the higher degrees of financial monopoly and lower degrees of market competition can result in the higher performance level of companies especially in an imperfect competitive market. The banking industry is an excellent field for which to test market monopoly power and performance. In this study, we analysed data from up to 16 selected listed commercial banks in China from 2006 to 2015. The study utilized the improved Lerner index to elucidate their degree of monopoly power, respectively. Alongside this analysis, a balanced panel data model was utilized to calculate a least squares estimation, maximum likelihood estimation and generalized moment estimation processes. The results show that the state-owned commercial banks in China have poor competitiveness due to the limitations of their system of operation and the limitations in the banks’ ability to make decisions, as they are highly influenced by state macro-policies. Actually, China’s distorted financial monopoly has resulted in the poor performance of banks in the long-term, and indirectly resulted in the waste of national resources and limitation of financial policies. The relationship between the choice of operational model and the performance of listed commercial banks is mainly dictated by their natural monopoly position although such degree will deeply distort by unreasonable financial policy.

Determinants of Interest Margin in Pakistan: A Panel Data Analysis

This paper explores the determinants of the net interest margin (NIM) using unbalanced panel data from 2003 to 2017. This paper’s objective is achieved by using a two-step system generalised method of moment (GMM) for estimation. Three different models are to account for two alternative measures of market competition. The empirical results of these models indicate that operating cost, profit tax, interest rate risk, Lerner index, national savings, money supply and the T-bill rate have significant positive associations with the NIM. Meanwhile, operational size, credit risk and the inflation rate negatively affect NIM. Furthermore, operating cost, taxation and the money supply are the main factors that influence the NIM. The present analysis provides a comprehensive view of the Lerner index, which is a better measure for capturing the degree of market power than the concentration measure (HHI). Managerial efficiency and risk aversion are bank-level factors that do not significantly determine NIM. Operating costs could be decreased by adopting new banking technologies. Therefore, higher competition, lower operating costs and restricted uncertain conditions in a macro environment, particularly in the money market, could reduce the NIM.

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.

Banking Competition and Efficiency: The Case of Vietnamese Banking Industry

This paper is to investigate the impact of competition on the efficiency of the banking industry in Vietnam. Data are collected from the audited annual financial statements and the annual reports of 30 commercial banks during the period of 2010 – 2017. Lerner index is used to measure the market power of bank, while Data Envelope Analysis is employed to estimate the technical efficiency of bank. The impact of competition on the operational efficiency of commercial banks is estimated by Panel Vector Autoregressive model (PVAR). The empirical results seem to indicate that there is a positive impact of competition on the bank efficiency, which is in line with the “quiet-life” hypothesis. However, the statistical test does not confirm this at the traditional levels. Interestingly, the empirical results demonstrate a negative impact of bank efficiency on the market power of bank, and hence market competition. While this result shares the causality dimension with the “efficient structure” hypothesis, it presents an opposite sign on the causality. All these findings could be explained by the real situations and typical characteristics of the economy of Vietnam. This study has important implications for both researchers and practioners.

Determinants of Market Power in the Peruvian Regulated Microfinance Sector

The objective of this study is to analyze the evolution and determinants of market power in Peru’s regulated microfinance sector during the period of January 2003 to June 2016. We estimate both a conventional Lerner index (LICON) and an efficiency-adjusted Lerner index (LIADJ) using information from a wide panel of microfinance institutions (MFIs), thus finding that the LIADJ is significantly greater than the LICON. This result confirms that not considering MFIs’ inefficiency leads to an underestimation of their market power. Both indices decreased until 2014, which indicates that regulated MFIs’ market power decreased significantly for more than a decade. Beginning in 2015, market power significantly grew; the largest entities as well as those with the highest efficiency have greater market power. This last result evidences the fulfillment of the efficient structure (ES) hypothesis. In addition, a less elastic demand for microcredit, a lower default risk, as well as the processes of mergers, takeovers, and changes in the business structure of some MFIs, increase market power. Finally, the MFIs that operate in localized areas exhibit greater market power.

The nexus between product market competition and the quality of analysts’ forecasts: empirical evidence from Chinese-listed firms

PurposeThis study aims to explore the relationship between product market competition (competition hereafter) and the quality of analysts’ forecasts.Design/methodology/approachThis study uses industry-level (i.e. Herfindahl–Hirschman index), as well as firm-level (i.e. Lerner index) measures of competition and uses forecast accuracy and forecasts dispersion as proxies for analysts’ forecast quality. Further, this study considers a sample of Chinese-listed manufacturing companies for the period spanning 2005 to 2016 and uses various estimation techniques to empirically test the hypothesized relationship.FindingsThe results show that firms in highly competitive industries are characterized by greater accuracy and smaller dispersion in forecasts. Further, this positive association is more pronounced in SOEs as compared to NSOEs, and in industries characterized by intense competition. The sensitivity analysis further endorses the main results.Practical implicationsPresenting theoretical and empirical evidence, this study suggests that regulatory bodies should take steps to promote the competitive environment in China. This can help financial analysts in developing more accurate and reliable forecasts and ultimately can bring informational efficiency to the market. Finally, investors would be able to perform their business valuation process in a better way and make economic-useful decisions regarding their capital resource allocation.Originality/valueThe contribution of the current research is threefold: first, it adds to the limited literature available on this specific topic; second, this study examines the issue in China and further single out the influence of state-ownership and intensity of competition on the relation between competition and forecast properties; and third, this study provides theoretical arguments for the positive association between competition and forecasts quality while setting directions for future research on the topic and suggests the potential channels such as the reporting quality channel and the information disclosure channel that need to be explored further, to better understand the mechanism where competition influences the quality of analysts’ forecasts.

THE COMPETITIVENESS IN THE BANKING INDUSTRY IN PALESTINE

The study measures the degree of competition in the banking industry in Palestine for the period from 2006 to 2010. It begins by measuring Lerner index, and then estimates the determinants of market power by regressing Lerner index on returns of assets and lending preferences. It uses data on 18 working banks in Palestine; the data is secondary, time-series and cross-sectional obtained by the Association of Banks in Palestine. The study establishes the log-log model for estimation and tests the variables according to the Ordinary Least Square method. The study concludes that the banking industry in Palestine is controlled by a few players, the assets concentration ratio is about 75%. About 72% of the working banks can raise the price above the marginal cost, and then able to earn profits.Keywords: Competition, Market power, Lerner index, Banking industry.JEL Classifications: B41, C32, L11, P34DOI: https://doi.org/10.32479/ijefi.9008

The determinants of bank stability: Evidence from selected Balkan countries and Turkey

The phenomenon of financial stability has gained importance as monetary and fiscal policies aiming at price stability in the global crises are not sufficient to prevent financial crises. After 2007 global crisis, the importance of bank stability better understood. This paper investigates the determinant of bank stability in selected Balkan countries and Turkey. For this aim, we used to Z-score and NPL as dependent variables. We used bank performance, financial structure and macro variables as independent variables. According to ANOVA test and regression analysis, the strongest correlation between non-performing loans as the dependent variable of the Western and some EU Member countries (Bosnia and Herzegovina, Serbia, Croatia, Slovenia, Montenegro, Macedonia) and Turkey was achieved with the following independent variables: the total non-interest income to total income and foreign bank assets to total bank assets. Observed on the other hand, the weakest link between NPLs as a dependent variable was achieved with the following independent variables: the gross domestic product, the net interest margin ratio, Lerner index and the cost to income. Another dependent variable, i.e., Z-score was recorded the strongest correlation with the following independent variables in the model: the gross domestic product, the Lerner index, the net interest margin and the cost to income. The weakest link was achieved with the following independent variables: the total non-interest income to total income and the foreign bank assets to total assets.

Competition and stability in the banking sector of Kazakhstan

This paper examines the relationship between competition and stability in the Kazakh banking sector using quarterly bank level data of private commercial banks. There have been many theories stand out on the relationship between competition and stability of the banking sector so far. But theories of the competition-fragility view and competition-stability view are widely accepted theories in the literature. The main method applied to achieve the established goal is a multiple regression analysis. Bank stability is used as a dependent variable and proxied by risk index. To measure the level of competition Lerner index and Boone indicator are calculated. Besides, the consistency between concentration and competition measures is tested applying a correlation analysis. Concentration in the banking sector is measured using Herfindahl-Hirschman Index (HHI) and concentration ratio CR5. The research revealed no statistically significant relationship between the values of Lerner index and Boone indicator estimated for Kazakh banking sector. The hypothesis about the consistency between different competition measures is rejected. In turn, the hypothesis about positive effect of competition on bank soundness is rejected only in the case when competition is proxies by Lerner index. Using Boone indicator as a competition measure, the results are doubtful.

When Measuring the Same Leads to Different Conclusions – A Critical Review of Measures Applied to Assess the Degree of Competition in Banking Systems

Abstract Economic studies on the degree of competition (DC) in banking systems use various measures which are subsumed under the 1) structure- (e.g. Herfin­dahl-Hirschman index), 2) conduct- (e.g. Boone indicator) or 3) performance-oriented approach (e.g. Lerner index). Yet, the respective empirical operationali­zations of the different DC measures are expected to represent one central construct – the true DC of a banking system. We review 35 studies covering 15 European banking systems from 1998 to 2007. Contrasting the central construct hypothesis, we find substantial differences in the produced DC measures. Thus, the economic validity of derived conclusions regarding the competition intensity is challenged. JEL Classification: E43; E52; E58; L16

The problems of assessing the competition of commercial banks through the index lerner

In this article, the methods of assessing the level of competition in the foreign banks market are analyzed in depth. On the basis of the index Lerner, the level of competition in the credit (deposit) market of commercial banks of the republic is assessed on the basis of the indicators of banks. In the world banking system, the importance of managing bank risks, assessing creditworthiness, financial stability of banks, financial management in crisis management, promoting a competitive market, attracting foreign investors and increasing customer confidence in the bank is growing. At the same time, the bank must choose the upper and lower limits when setting interest rates for customer service. In a competitive environment, the banking system and the market are closely interconnected. The first defines classifications in a general area that defines the microeconomics of blood vessels, and the second defines the main characteristics of microeconomics. A study by Boone (2008) on the indicator of resistance to increasing its market share can be cited. The indicator of the H-statistics method (with the exception of Bun) in Panzara-Ross was widely used because it is easy to calculate with little use of data compared to other estimation methods. Only the Lerner index is an indicator of microeconomic assessment, while other indicators are accepted as an assessment of industry competition. Subsequently, new indicators were developed to summarize the two blocks. Mention is made of the local optimization method provided by Mantos Delis (the local maximization method).

Dynamic of Banking Sector in Benin: Do More Competition Imply More Efficiency?

Dynamic of Banking Sector in Benin: Do More Competition Imply More Efficiency? Alain Latoundji Babatoundé Abstract This paper examines the dynamics of the financial system including banks and Decentralized Financial Systems (DFS) in Benin. While the reforms have produced the expected effect in terms of financial depth, compared to other developing countries, financial deepening is still weak - despite a remarkable contribution of DFS - with respect to the economy's mediumand long-term production or growth objectives. The result is an expansion of financial dualism with the financial micro intermediationdevelopment. Is the consequent financial architecture efficient in providing appropriate solutions to the economy's financing constraints? Concentration and competition are evaluated according to different indicators: the market shares of the first banks, the Lerner index and the H-statistics indicate a concentration structure with a low level of competition. If this has improved since 2010, they call for an analysis of the efficiency of the banking market in Benin. We apply then the Panzar and Rosse methodologyto account for technical inefficiencies in the banking system as a whole. The results confirm the absence of an explicit relationship between competition and efficiency; they also recommend a better organization of the Benin’s financial system to meet the requirements of financial stability, economy financing, and financial inclusion. Full Text: PDF DOI: 10.15640/jeds.v8n2a1

Which Investors Matter for Equity Valuations and Expected Returns?

Much work in finance is devoted to identifying characteristics of firms, such as measures of fundamentals and beliefs, that explain differences in asset prices and expected returns. We develop a framework to quantitatively trace the connection between valuations, expected returns, and characteristics back to institutional investors and households. We use it to analyze (i) what information is important to investors in forming their demand beyond prices and (ii) what is the relative importance of different investors -- differentiated by type, size, and active share -- in the price formation process. We first show that a small set of characteristics explains the majority of variation in a panel of firm-level valuation ratios across countries. We then estimate an asset demand system using investor-level holdings data, allowing for flexible substitution patterns within and across countries. We find that hedge funds and small, active investment advisors are most influential per dollar of assets under management, while long-term investors, such as pension funds and insurance companies are least influential. In terms of pricing characteristics, small, active investment advisors are most important for the pricing of payout policy, cash flows, and the fraction of sales sold abroad. Large, passive investment advisors are most influential in pricing the Lerner index, a measure of markups, and hedge funds for the CAPM beta.