Efficiency and Market Power in Spanish Banking

Some recent studies have been investigating the existence of market power in the European banking system, in general, and the Spanish banking industry, in particular. Although results are mixed, the evidence suggests some commercial banks and savings banks benefit from monopoly rents. Some other studies [Berger and Hannan, Review of Economics and Statistics LXXX (1998) 454-465] have also found strong evidence that banks in more concentrated markets exhibit lower cost efficiency levels. Our study merges these two groups of findings by exploring how cost efficiency measures for Spanish banks are related to market power using more flexible techniques, which are more consistent with those employed to measure efficiency in the first stage of the analysis. Results show that the relationship varies according to the level of market power, the component of efficiency evaluated (cost, technical or allocative) and the type of banking firm (commercial bank or savings bank), suggesting that the "quiet life" might be a reality only for some banks.

[1]  H. Leibenstein,et al.  On the Basic Proposition of X-Efficiency Theory , 1978 .

[2]  Joan Oriol Prats Cabrera.  Causas políticas y consecuencias sociales de la corrupción , 2008 .

[3]  J. Hicks.  Annual Survey of Economic Theory: The Theory of Monopoly , 1935 .

[4]  P. Rosenau.  Market Structure and Performance , 2001, Journal of health & social policy.

[5]  E. Nadaraya.  On Estimating Regression , 1964 .

[6]  Wolfgang Härdle,et al.  APPLIED NONPARAMETRIC METHODS , 1992 .

[7]  David Abad Díaz.  Agresividad de las órdenes introducidas en el mercado español: estrategias, determinantes y medidas de performance , 2005 .

[8]  Subal C. Kumbhakar,et al.  Stochastic frontier analysis , 2000 .

[9]  J. Engel,et al.  Recent approaches to estimating Engel curves , 1996 .

[10]  D. Humphrey,et al.  Deregulation, Bank Competition and Regional Growth , 2003 .

[11]  G. S. Watson,et al.  Smooth regression analysis , 1964 .

[12]  A. Vivas.  Profit efficiency for Spanish savings banks , 1997 .

[13]  Frederic S. Mishkin,et al.  The Decline of Traditional Banking: Implications for Financial Stability and Regulatory Policy , 1995 .

[14]  Carlos Martins-Filho,et al.  Nonparametric frontier estimation via local linear regression , 2007 .

[15]  Allen N. Berger,et al.  Bank efficiency derived from the profit function , 1993 .

[16]  Sherrill Shaffer.  Can megamergers improve bank efficiency , 1993 .

[17]  Joseph G. Haubrich,et al.  Bank Concentration and Competition: An Evolution in the Making , 2004 .

[18]  Emili Tortosa‐Ausina.  Bank Cost Efficiency and Output Specification , 2002 .

[19]  Alfonso Palacio Vera.  On zero lower bound traps: a framework for the analysis of monetary policy in the "age" of central banks , 2005 .

[20]  D. Prior,et al.  On the determinants of local government performance: A two-stage nonparametric approach , 2007 .

[21]  W. G. Shepherd.  Economies of Scale and Monopoly Profits , 1983 .

[22]  Michael S. Dahl,et al.  The devil dwells in the tails , 2010 .

[23]  Philip Molyneux,et al.  Cross-Country Comparisons of Competition and Pricing Power in , 2006 .

[24]  M. C. Keeley,et al.  Deposit insurance, risk, and market power in banking , 1988 .

[25]  José López Rodríguez,et al.  La internacionalización de la empresa manufacturera española: Efectos del capital humano genérico y específico , 2006 .

[26]  Alan S. McCall,et al.  Market Power and Structure and Commercial Bank Installment Lending , 1975 .

[27]  David V. Conesa,et al.  Bootstrapping profit change: An application to Spanish banks , 2012, Comput. Oper. Res..

[28]  J. Maudos,et al.  The cost of market power in banking: social welfare loss vs. inefficiency cost , 2006 .

[29]  Stefan Sperlich,et al.  Precio de la tierra con presión urbana: Un modelo para España , 2005 .

[30]  D. Neven,et al.  An aggregate structural model of competition in the European banking industry , 1999 .

[31]  A. Aldanondo-Ochoa,et al.  ENVIRONMENTAL IMPLICATIONS OF ORGANIC FOOD PREF- ERENCES: AN APPLICATION OF THE IMPURE PUBLIC GOODS MODEL , 2006 .

[32]  W. G. Marshall,et al.  Tobin's q and the Structure-Performance Relationship: Reply , 1984 .

[33]  Richard A. Davis,et al.  Remarks on Some Nonparametric Estimates of a Density Function , 2011 .

[34]  Hurvey Leibenstein.  Allocative efficiency vs. X-Efficiency , 1966 .

[35]  J. Maudos.  Market structure and performance in Spanish banking using a direct measure of efficiency , 1998 .

[36]  Timothy H. Hannan.  Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending , 1991 .

[37]  Nicola Cetorelli.  Real Effects of Bank Competition , 2004 .

[38]  Paulo M.M. Rodrigues,et al.  Testing for Structural Breaks in Variance with Additive Outliers and Measurement Errors , 2006 .

[39]  F J André,et al.  Using compromise programming for macroeconomic policy making in a general equilibrium framework: theory and application to the Spanish economy , 2008, J. Oper. Res. Soc..

[40]  Magdalena Massot Perelló,et al.  Refleja la estructura temporal de los tipos de interés del mercado español preferencia por la liquidez , 2005 .

[41]  J. Maudos,et al.  Market Power in European Banking Sectors , 2005 .

[42]  B. Silverman,et al.  Spline Smoothing: The Equivalent Variable Kernel Method , 1984 .

[43]  J. Florens,et al.  Nonparametric frontier estimation: a robust approach , 2002 .

[44]  William L. Weber,et al.  Small-Business Lending and Profit Efficiency in Commercial Banking , 2002 .

[45]  S. Rhoades.  Research on IO Topics in Banking: An Introduction and Overview , 1997 .

[46]  P. J. Green,et al.  Density Estimation for Statistics and Data Analysis , 1987 .

[47]  José Manuel Cordero-Ferrera,et al.  Measuring efficiency in education: an analysis of different approaches for incorporating non-discretionary inputs , 2008 .

[48]  Diego Prior,et al.  Devolution Dynamics of Spanish Local Government , 2010 .

[49]  Alan T. K. Wan,et al.  On the use of spline smoothing in estimating hedonic housing price models: Empirical evidence using Hong Kong data , 2004 .

[50]  Rolf Färe,et al.  The effect of risk-based capital requirements on profit efficiency in banking , 2004 .

[51]  Matthew P. Wand,et al.  Kernel Smoothing , 1995 .

[52]  L. Simar,et al.  Nonparametric efficiency analysis: a multivariate conditional quantile approach , 2007 .

[53]  Timothy F. Bresnahan,et al.  Empirical studies of industries with market power , 1989 .

[54]  J. Bain.  Barriers to new competition , 1957 .

[55]  S. Gil‐Pareja,et al.  Trade effects of monetary agreements: Evidence for OECD countries , 2008 .

[56]  Elena Márquez de la Cruz,et al.  La elasticidad de sustitución intertemporal con preferencias no separables intratemporalmente: los casos de Alemania, España y Francia , 2005 .

[57]  Allen N. Berger,et al.  Measurement and Efficiency Issues in Commercial Banking , 1992 .

[58]  Eva Herrmann,et al.  Local Bandwidth Choice in Kernel Regression Estimation , 1997 .

[59]  David Cantarero Prieto,et al.  LA NUEVA FINANCIACIÓN SANITARIA EN ESPAÑA: DESCENTRALIZACIÓN Y PROSPECTIVA , 2005 .

[60]  R. R. Russell,et al.  Technological Change, Technological Catch-up, and Capital Deepening: Relative Contributions to Growth and Convergence , 2002 .

[61]  David B. Humphrey,et al.  EFFECTS OF ATMs AND ELECTRONIC PAYMENTS ON BANKING COSTS: THE SPANISH CASE BANKING , 2003 .

[62]  W. Härdle.  Applied Nonparametric Regression , 1992 .

[63]  Robert A. Lordo,et al.  Nonparametric and Semiparametric Models , 2005, Technometrics.

[64]  V. Salas-Fumás,et al.  Governance Mechanisms in Spanish Banks: Does Ownership Matter? , 2003 .

[65]  J. González‐Benito,et al.  Environmental proactivity and business performance: an empirical analysis , 2005 .

[66]  Joaquín Maudos Villarroya,et al.  Competencia versus poder de mercado en la banca española , 2003 .

[67]  M. Álvarez‐Díaz,et al.  The quality of institutions: A genetic programming approach , 2008 .

[68]  O. D. Bandt,et al.  Competition, contestability and market structure in European banking sectors on the eve of EMU , 2000 .

[69]  T. Gasser,et al.  Locally Adaptive Bandwidth Choice for Kernel Regression Estimators , 1993 .

[70]  S. Miller,et al.  The technical efficiency of large bank production , 1996 .

[71]  Gonzalo Caballero Miguez,et al.  La gobernanza de los procesos parlamentarios: la organización industrial del congreso de los diputados en España , 2005 .

[72]  Philip Molyneux,et al.  Competitive conditions in european banking , 1994 .

[73]  M. Petersen,et al.  The Effect of Credit Market Competition on Lending Relationships , 1994 .

[74]  Jeffrey H. Dorfman,et al.  Current developments in productivity and efficiency measurement , 2005 .

[75]  Carlos Martins-Filho,et al.  A Nonparametric Model of Frontiers , 2004 .

[76]  C. Lovell,et al.  Deregulation and productivity decline: the case of Spanish savings banks , 1996 .

[77]  John Sutton,et al.  Market structure and performance , 2001 .

[78]  David Ruppert,et al.  Theory & Methods: Spatially‐adaptive Penalties for Spline Fitting , 2000 .

[79]  E. Nadaraya.  On Non-Parametric Estimates of Density Functions and Regression Curves , 1965 .

[80]  J. M. Pastor,et al.  Cost and profit efficiency in the Spanish banking sector (1985–1996): a non-parametric approach , 2003 .

[81]  Allen N. Berger,et al.  Efficiency of Financial Institutions: International Survey and Directions for Future Research , 1997 .

[82]  V. Salas,et al.  Deregulation, market power and risk behaviour in Spanish banks , 2003 .

[83]  Salvador Rojí Ferrari,et al.  MEASUREMENT AND ANALYSIS OF THE SPANISH STOCK EX- CHANGE USING THE LYAPUNOV EXPONENT WITH DIGITAL TECHNOLOGY , 2006 .

[84]  M. Hazelton,et al.  Plug-in bandwidth matrices for bivariate kernel density estimation , 2003 .

[85]  Daniel Santín,et al.  On the generation of a regular multi-input multi-output technology using parametric output distance functions , 2005 .

[86]  W. G. Shepherd,et al.  Tobin's q and the Structure-Performance Relationship: Comment , 1986 .

[87]  J. M. Villarroya,et al.  Integration and competition in the european financial markets , 2003 .

[88]  Qi Li,et al.  Nonparametric Econometrics: Theory and Practice , 2006 .

[89]  David Neumark,et al.  Market structure and the nature of price rigidity: evidence from the market for consumer deposits , 1992 .

[90]  Johan Stennek.  Competition increases x-efficiency: A limited liability mechanism , 2000 .

[91]  Barbara Casu,et al.  Testing the relationship between competition and efficiency in banking: A panel data analysis , 2009 .

[92]  Allen N. Berger,et al.  The Efficiency Cost of Market Power in the Banking Industry: A Test of the Quiet Life and Related Hypotheses , 1998, Review of Economics and Statistics.

[93]  Allen N. Berger,et al.  The Rigidity of Prices: Evidence from the Banking Industry , 1991 .

[94]  Francisco González,et al.  Cross-country determinants of bank income smoothing by managing loan loss provisions , 2008 .

[95]  Allen N. Berger,et al.  The Price-Concentration Relationship in Banking , 1989 .

[96]  Anoop Rai,et al.  The structure-performance relationship for European banking , 1996 .

[97]  M. Wand,et al.  Multivariate plug-in bandwidth selection , 1994 .

[98]  Mónica Melle Hernández.  The Euro Effect on the Integration of the European Stock Markets , 2004 .

[99]  Luis R. Murillo-Zamorano.  Economic Efficiency and Frontier Techniques , 2004 .

[100]  Léopold Simar,et al.  Advanced Robust and Nonparametric Methods in Efficiency Analysis: Methodology and Applications , 2007 .

[101]  Léopold Simar,et al.  Introducing Environmental Variables in Nonparametric Frontier Models: a Probabilistic Approach , 2005 .

[102]  Ana Rodríguez Álvarez,et al.  Firm and time varying technical and allocative efficiency: an application for port cargo handling firms , 2005 .

[103]  Stijn Claessens,et al.  Financial Dependence, Banking Sector Competition, and Economic Growth , 2005 .

[104]  Daniel Santín González,et al.  Funciones abreviadas de bienestar social: Una forma sencilla de simultanear la medición de la eficiencia y la equidad de las políticas de gasto público , 2006 .

[105]  S.Carbó Valverde,et al.  Can the excess of liquidity affect the effectiveness of the european monetary policy , 2005 .

[106]  David C. Wheelock,et al.  Robust Nonparametric Quantile Estimation of Efficiency and Productivity Change in U.S. Commercial Banking, 1985–2004 , 2009 .

[107]  Juan Fernández de Guevara,et al.  Factors Explaining the Interest Margin in the Banking Sectors of the European Union , 2003 .

[108]  Waymond Rodgers,et al.  DEVELOPING A PREDICTIVE METHOD: A COMPARATIVE STUDY OF THE PARTIAL LEAST SQUARES VS MAXIMUM LIKELIHOOD TECHNIQUES , 2006 .

[109]  J. Maudos,et al.  The cost of market power in banking: Social welfare loss vs. cost inefficiency , 2007 .

[110]  B. Ripley,et al.  Semiparametric Regression: Preface , 2003 .

[111]  Emili Tortosa‐Ausina.  Cost Efficiency and Product Mix Clusters across the Spanish Banking Industry , 2002 .

[112]  W. Härdle.  Nonparametric and Semiparametric Models , 2004 .

[113]  X. Fu,et al.  The effects of reform on China’s bank structure and performance , 2009 .

[114]  Víctor M. González.  BANK OWNERSHIP AND INFORMATIVENESS OF EARNINGS , 2006 .

[115]  Gregory F. Udell,et al.  Bank Market Power and SME Financing Constraints , 2006 .

[116]  H. Demsetz.  Industry Structure, Market Rivalry, and Public Policy , 1973, The Journal of Law and Economics.

[117]  E. Parzen.  On Estimation of a Probability Density Function and Mode , 1962 .

[118]  Jeffrey A. Clark.  Single-equation, multiple-regression methodology: Is it an appropriate methodology for the estimation of the structure-performance relationship in banking? , 1986 .

[119]  C. Thomas-Agnan,et al.  NONPARAMETRIC FRONTIER ESTIMATION: A CONDITIONAL QUANTILE-BASED APPROACH , 2005, Econometric Theory.

[120]  M. Carmen Lima,et al.  Análisis de impacto de los Fondos Estructurales Europeos recibidos por una economía regional: un enfoque a través de Matrices de Contabilidad Social , 2005 .

[121]  Justin L. Tobias,et al.  Nonparametric Density and Regression Estimation , 2001 .

[122]  P. Ngo.  The Microeconomics of Banking , 2009 .

[123]  Qi Li,et al.  Nonparametric testing of closeness between two unknown distribution functions , 2009 .

[124]  John C. Panzar,et al.  TESTING FOR "MONOPOLY" EQUILIBRIUM* , 1987 .

[125]  Kevin E. Rogers.  Nontraditional activities and the efficiency of US commercial banks , 1998 .

[126]  Can market power be estimated? , 1993 .

[127]  Philip Molyneux,et al.  Market structure and performance in Spanish banking , 1994 .

[128]  Nicola Cetorelli,et al.  The Effects of Regulatory Reform on Competition in the Banking Industry , 2003 .

[129]  Harold O. Fried,et al.  The measurement of productive efficiency : techniques and applications , 1993 .

[130]  L. Laeven,et al.  What Drives Bank Competition? Some International Evidence , 2003 .

[131]  Fotios Pasiouras,et al.  Assessing Bank Efficiency and Performance with Operational Research and Artificial Intelligence Techniques: A Survey , 2009, Eur. J. Oper. Res..

[132]  Andrés,et al.  LOAN BANKERS’ DECISIONS AND SENSITIVITY TO THE AUDIT REPORT USING THE BELIEF REVISION MODEL , 2004 .

[133]  H. Müller,et al.  Kernel estimation of regression functions , 1979 .

[134]  H. Leibenstein.  General X-Efficiency Theory and Economic Development , 1978 .

[135]  D. Humphrey,et al.  EXPLAINING BANK COST EFFICIENCY IN EUROPE: ENVIRONMENTAL AND PRODUCTIVITY INFLUENCES. , 2005 .

[136]  David B. Humphrey,et al.  The falling share of cash payments in Spain , 2003 .

[137]  Theo Gasser,et al.  A Unifying Approach to Nonparametric Regression Estimation , 1988 .

[138]  A. Lerner.  The Concept of Monopoly and the Measurement of Monopoly Power , 1934 .

[139]  Allen N. Berger.  The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses , 1995 .

[140]  Humphrey,et al.  EFFICIENCY DIFFERENCES AMONG BANKS: EXTERNAL, TECHNICAL, INTERNAL, AND MANAGERIAL , 2004 .