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The first version of this paper was written as a background paper for the IMF’s International Capital Markets Report 2001. One of the authors, R. Gaston Gelos, is now in the Research Department but was a member of the International Capital Markets Department when the first version of this paper was prepared. The authors wish to thank Silvia Iorgova for research assistance; Susan Collins, Giovanni Dell’ Ariccia, Linda Goldberg, and participants at the May 2002 conference, “Financial Globalization, A Blessing or a Curse?” for comments; and Luc Laeven for providing data.
The extent to which intense competition in the banking sector is desirable, is, of course, subject of considerable debate. See, for example, Bonaccorsi di Patti and Dell’ Ariccia, forthcoming, for a summary of the literature on the effects of competition on lending behavior and Matutes and Vives (1996), or Cordella and Levy Yeyati (2002) for examples of studies of the link between bank competition and financial fragility. We do not address this normative question in this paper.
See Group of Ten (2001) for a survey of the main causes of consolidation in industrialized countries.
The extent and consequences of foreign ownership in emerging market banking systems has been studied extensively; see, for instance, Clarke, Cull, Martinez Peria, and Sanchez (2001); Mathieson and Roldós (2001), and the references therein to regional and individual country studies.
Yoshitomi and Shirai (2001) note that commercial banks in Indonesia, the Republic of Korea, and Thailand are often owned by family businesses under family controlled conglomerates. Claessens, Djankov, and Lang (1999) document that smaller, as well as older, corporations in Asia are family-controlled. Family control is generally enhanced through pyramid structures, cross-shareholdings, and deviations from one-share-one-vote rules.
Rajan and Zingales (1998) argue that, in the past, some Asian governments protected commercial banks by setting the maximum rate on deposits; when this policy was no longer feasible under deregulation and intensified competition, then governments protected banks through explicit or implicit guarantees and barriers to entry, increasing the banks’ franchise value.
See Cetorelli (1999) for examples of how the HH index varies with different patterns of large and small banks.
In particular, a number of medium and small-sized banks grew very fast before the crisis and emerged relatively unscathed from the crisis; this factor, combined with family and group-related ownership structures, made takeovers difficult to carry out (see IMF, 2001).
The objectives of the Malaysian authorities were clarified with the publication, in March 2001, of a Financial Sector Master Plan (FSMP). The FSMP charts the future direction of the financial sector for the next 10 years and states that the main objective of the first phase is to develop a core set of strong domestic banking institutions, to be followed by a phase that levels the playing field with the incumbent foreign players and a final one that allows further foreign competition (see Bank Negara Malaysia, 2001).
Abut, Biggio, and Siller (2000a) and Abut, Bigio, and Mullen (2001) show somewhat higher figures for the HH indices, a result of a different sample of banks and different accounting conventions, but their results suggest the same qualitative pattern. As was noted in IMF (2000), Fitch IBCA makes an effort to adjust individual bank accounts for differences in reporting and accounting standards, and puts the accounts into a standardized global format.
The more recent acquisition of Banamex by Citigroup will further increase the degree of concentration.
A controlling interest in IPB was sold to Nomura Securities in 1998. However, Nomura reportedly regarded its stake in IPB as a portfolio investment and, apart from the sale of IPB’s stronger assets, engaged in little restructuring of the bank. As IPB’s performance continued to deteriorate, a “quiet” run on its deposits began (its deposits declined by about 50 percent in the first half of 2000) and the Czech National Bank (CNB) was forced to intervene in order to prevent a systemic crisis.
There were 55 applications (mainly from industrial groups) pending approval by the Treasury at end-1995, but only a few were approved (see Fitch IBCA, 1996).
See Baumol, Panzar, and Willig (1982) and Tirole (1988), p. 309. For a different argument on why regulation-induced higher concentration could yield more intense competition, see Schargrodsky and Sturzenegger (2000).
Note however, that product differentiation is allowed for in the monopolistic competition model.
Further assumptions include profit maximization and normally shaped revenue and cost functions.
For studies of European countries, see Molyneux, Lloyd-Williams, and Thornton (1994), Bikker and Groeneveld, (2000), and De Bandt and Davies, (2000). Individual country studies have examined banking markets in Austria (Mooslechner and Schnitzer, 1995), Italy (Coccorese, 1998), Switzerland (Rime, 1999), Germany (Lang, 1997, and Hempell, 2002), Japan (Molyneux, Lloyd-Williams, and Thornton, 1996), and Finland (Vesala, 1995). The only study based on this methodology of an emerging market that we are aware of is Feyzioğlu and Gelos (2000), which examines the case of Bulgaria.
The severe balance sheet impairment and negative revenues of the Asian crisis countries prevented their inclusion in the regression analysis of this section.
For similar definition of variables, see de Bandt and Davis (2000), Molyneux, Lloyd-Williams and Thornton (1994), Molyneux, Thornton and Lloyd-Williams (1996), Nathan and Neave (1989), Rime (1999), and Shaffer (1982).
It would have been preferable to use the number of employees in the denominator. However, the Fitch IBCA data for this variable is very scant, and we were not able to collect comprehensive time series from other sources, except for the case of Poland, and, to a more limited extent, Argentina.
There was not enough information available on other liabilities such as subordinated debt or long-term borrowing.
The results for Brazil are in line with the findings by Nakane (2001), who, using a different methodology, concludes that Brazilian banks do have some market power and that neither perfect competition nor monopoly accurately describes the competitive conditions of the Brazilian banning market.
De Bandt and Davis (2000) argue that deposits and loans represent the most labor-intensive bank activities.