Intra-banking competition in Ecuador: new evidence using panel data approach.
| Autor | Solano, Javier |
Introduction
The private banking market is one of the most important sectors in developed and developing economies and is now growing to be a sector of interest to policymakers because banks are institutions that inject money in the economy and help to boost it when there are problems in some industries, especially in productive sectors. Also, Goddard and Wilson (2009) mention that most households and businesses engage in transactions with banks, for deposits, loans and other financial services, and banks perform a vital economic function in channelling funds from savers to investors and in the monetary policy transmission mechanism.
In this sense, banking competition helps to foster higher economic growth (Buchs and Mathisen, 2005). It enhances efficiency, as it compels managers to cut down on costs to remain profitable (Claessens and Laeven, 2004). Also, banking competition facilitates banks to satisfy the needs of the public at a reduced social cost and enhances the efficiency of the production and quality of financial services and products. For this, Claessens and Laeven (2004) argued that a reduction in the level of competition in the banking sector will make provision of financial services costly, leading to less financing which impedes economic growth.
According to this, Bikker et al. (2012), Yildirim and Philippatos (2007) and De Bandt and Davis (2000) analyse not only the competition in the banking industry but also the banking competition by size group and conclude that large and small banks (not medium-sized banks) operate in monopolistic competition in many countries. However, other authors such as Berger and Black (2011), De Haan and Poghosyan (2012) and Uchida et al. (2008) argue that banks by size group have different characteristics to lend to different firm sizes; this situation depends on the type of credit and the type of firm that borrows.
The main purpose of this study is to assess the competition and analyses if there are differences between sizes (regarding competition) in the private banking sector using a nonstructural approach developed by Panzar and Rosse, we compare four estimation techniques to obtain the competition degree for each group of banks segmented by size and we also test if the market is in long-run equilibrium. Camino-Mogro and Armijos-Bravo (2018) assess the banking competition in Ecuador controlling by size; however, it is notorious in Ecuador that private banks compete not only in the entire market but also in sizes, that is, small banks have their credit segment, different from large and medium-sized banks. In this sense, we compared banks by size using a reduced price and revenue equation, to get robust evidence intra-banking competition.
This paper contributes to the actual literature of competition degree in two ways. First, different to traditional papers, we assess the degree of competition in the Ecuadorian private banking sector using the bank size classification and take advantage of this issue since competition by size could be different because there is a banking specialisation in terms of size, levels of liquidity, risk and other indicators that are different from one group to another. Second, we show the robustness of our results using a scaled and unscaled equation using many controls and similar to Apergis et al. (2016), we use the panel-corrected standard error and feasible generalised least squares to contrast the value of H-statistic obtained by pooled ordinary least squares (POLS), fixed effects (FE) and random effects (RE).
Another important issue is that Ecuador is a dollarised emerging economy and unique in South America, with some financial system characteristics such as it is not allowed that a foreign bank has more than 50% participation on a national bank; there is a tax applied on the exit of local currency to foreign locations which decreases the participation of foreign firms in the financial system; it is not allowed that the Central Bank acts as a lender of last resort; there is a liquidity fund constituted from contributions of financial institutions, and banks also have the obligation to set up a guarantee trust equivalent to 100% of its assets. All these applied regulations generate an important interest in studying the level of private banking competition in Ecuador, to be able to know whether, in addition to contributing with a healthy financial system, they helped or not to improve the competition.
Using annual data on the private banking sector in Ecuador for the period 2000-2015, we find that bank size decreases competition, in particular, large banks operate in a monopolistic environment, while medium-sized and small banks operate in a monopolistic competition but tend to be perfect competition. Our results show that the degree of competition is different by bank size, in this line, we propose the analysis of banking competition by the disaggregation of group size when there are huge differences in bank characteristics across size because of, for example, the different types of loans offered by each bank (specialisation).
The paper is structured as follows: Section 2 gives an overview of the Ecuadorian private banking sector. Section 3 provides a literature review about banking competition, banking concentration, and bank size. In Section 4, we present our data and the empirical method used. We provide our empirically results in Section 5. Finally, Section 6 concludes.
-
Overview of the Ecuadorian private banking sector
Ecuador is a dollarised country since 2000, and after this monetary process, some regulations were applied to the financial system concerning banking supervision, competition, public-available risk rating, microfinance risk and control of market liquidity risk to prevent other banking crisis. However, those regulations adopted since 2000 have not improved the competition degree because these policies were done only to strengthened the financial system, one proof of this is that the four major banks concentrate around 60% of deposits and loans (Uzcategui-Sanchez etal, 2018; Salgado, 2010).
The Ecuadorian financial system is composed of public and private institutions authorised and regulated by Superintendence of Banks (SB: the institution at the country level that regulates both public and private banking institutions). In this financial system, the subsectors, public banks, private banks, financial companies, savings and credit cooperatives and mutualists (Superintendencia de Bancos del Ecuador, 2016) operate under different conditions. Public and private banks are the most important subsectors, and there are marked differences between them. Salgado (2010) mentions that the private banking sector operates around 75% of total deposits and loans of the financial system, different for the public banks that operates around 13% of those accounts. Because of these differences, in this research, we analyse only the private banking sector because the dollarisation system was adopted in 2000-2015.
Additionally, in Ecuador, the SB classifies the banks' size by their total assets using the percentiles methodology according to the data of the participation of the total asset, resulting in large (>36%), medium-sized (12%
Another difference between sizes, particularly in 2015, is that large banks are mostly servicing corporate commercial loans (around 40%) and small and medium-sized enterprise (SME) loans (around 16%) and small banks attend in major microcredits (around 55%) that are loans with a higher level of risk than corporate, entrepreneurship and SME loans. This difference is because of liquidity, solvency, positioning and risk.
-
Literature review
In most countries, there is a bank classification by size; some countries use the criteria of the number of employees, financial revenues, total assets, fixed assets and others. In Ecuador, the SB classifies bank size by total assets, where there are some differences across size groups with loan target being one of the most important.
In this line, large, medium and small banks could compete in different ways; Berger and Black (2011) found that large banks do not have advantages over small banks in lending to relatively large firms. However, other studies examined the differences in earnings between banks of different sizes and concentrations in the banking sector in the USA, this research concludes that large banks located in concentrated markets tend to have higher volatility in earnings during the financial crisis (De Haan and Poghosyan, 2012). In Japan, an empirical study suggests that large banks usually borrow to large firms as well as large banks do not necessarily have a comparative advantage in extending transaction-based lending. The study also showed that small banks tend to have stronger relationships with their borrowers compared to large banks (Uchida et al., 2008).
According to Berger et al. (2005), large banks are less willing to lend to firms about which they have limited information; they also found that small banks have higher ability to allocate capital to risky borrowers; small banks are better in collecting and acting on "soft" information. Stever (2007) argues that small banks are riskier because of their limited ability to diversify. His data refers to the US bank holding companies between 1986 and 2003 and also reports that small banks have fewer opportunities to diversify, which forces them to probably pick borrowers whose assets have relatively low credit risk to make loans that are backed by more collateral. This lower diversification, in turn, may result in higher earnings volatility.
The diversity in the market share in which the banks compete generates an average effect when studying the concentration. Castellanos (2010), to reduce this impact, uses a division by size when analysing the power of the banking sector in Guatemala. One of the techniques used in the new industrial organisation to evaluate competition in the...
Para continuar leyendo
Solicita tu pruebaCOPYRIGHT GALE, Cengage Learning. All rights reserved.
