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Does market power influence bank profits in Mexico? A study on market power and efficiency

Jesus Gustavo Garza-Garcia

Applied Financial Economics, 2012, vol. 22, issue 1, pages 21-32

Abstract: The Mexican banking sector has experienced a process of consolidation which has caused concerns of possible collusion effects. This article analyses the determinants of bank performance in the Mexican banking sector for the period 2001--2009. Two market power hypotheses, Structure-Conduct-Performance (SCP) and Relative-Market-Power (RMP) alongside two variants of the Efficient-Structure (ES) hypotheses are tested in order to find out whether bank performance has been driven by market structural effects or by greater efficiency. The results state that bank profits have been determined by greater market share, confirming the RMP hypothesis. At the same time, the findings show that profits persist over time and adjust slowly to their natural (average) level, suggesting that the banking sector is not very competitive. Moreover, there is no evidence of a positive relationship between greater efficiency and bank profits. Finally, while capitalization levels increase bank profits, liquidity risk decreases them.

Date: 2012
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