Market Power and Efficiency in the Czech Banking Sector

Anca Pruteanu-Podpiera, Laurent Weill and Franziska Schobert

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring a reduction of loan rates and then investment. These expected gains are a major issue for transition countries, in which bank credit represents the largest source of external finance for companies. With the use of exhaustive quarterly data for Czech banks, this paper aims to provide evidence on the effects of banking competition in the Czech Republic. First, we measure the level and evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, using data on loan prices. The results do not show a clear-cut trend in the evolution of the Lerner index. Second, we investigate the relationship and causality between competition and efficiency. We perform a Granger-causality-type analysis. This supports the ‘banking specificities’ hypothesis, according to which heightened competition can lead to an increase in monitoring costs through a reduction in the length of the customer relationship and due to the presence of economies of scale in the banking sector, in this way reducing the cost efficiency of banks. Therefore, our results reject the intuitive ‘quiet life’ hypothesis and indicate a negative relationship between competition and efficiency in banking.

Keywords: Banks; competition; efficiency; transition countries. (search for similar items in EconPapers)
JEL-codes: G21 L12 P20 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-ban, nep-com, nep-eff, nep-ind, nep-mic and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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