Determining the Optimal Amount of Market Power to Maximize the Performance of the Banking Industry

Hassan Rezaei (), Mohammad Reza Lotfalipour () and Mohamad Ali Falahi ()
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Hassan Rezaei: Ph.D. Student of Economics, Ferdowsi University, Mashhad, Iran
Mohammad Reza Lotfalipour: Professor of Ferdowsi University, Mashhad, Iran
Mohamad Ali Falahi: Professor of Ferdowsi University, Mashhad, Iran

Quarterly Journal of Applied Theories of Economics, 2022, vol. 8, issue 4, 1-34

Abstract: The purpose of this paper is to study the factors inside and outside the banking industry on its performance. For this purpose, using the statistics of 170 countries during the years 1995-2017. The paper’s data analysis is System Generalized Method of Moments (System GMM) approach. After examining the static variability of the variables, the correlational relationships of the models are examined and the results indicate the existence of long-run equilibrium relations between the variables. In order to study the effect of each of the variables on performance indicators, the estimation model was studied and examined. The results of the study show that the structure-behavior-performance hypotheses (SCP) and efficient structure (ES) are confirmed and the relative market power hypothesis (RMP) are rejected. An inverse U-shaped relationship was found between concentration and profitability, which increased to a threshold level of 0.164 for the Lerner index, with increasing concentration, profitability increasing and then decreasing, and the relationship between concentration and performance being the U-shaped curve after the level. A threshold of 0.25 for the Lerner index increases performance. Considering institutional quality makes the relationship between concentration and profitability U-shaped. Therefore, institutional quality moderates the adverse effects of market power on profitability. Also, considering institutional quality causes the relationship between concentration and efficiency to be inverted U-shaped. This means that in a low-quality institutional environment, market power leads to inefficiency and the hypothesis of a quiet life is confirmed, and in a high-quality institutional environment, market power leads to greater efficiency and the hypothesis of a quiet life is rejected.

Keywords: Market structure; banking performance; institutional quality (search for similar items in EconPapers)
JEL-codes: C40 E02 L10 L25 (search for similar items in EconPapers)
Date: 2022
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