Abstract:Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring the 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 at providing evidence on the effects of banking competition in the Czech Republic. First, we measure the level and the evolution of banking competition between 1994 and 2005.Competition is measured by the Lerner index on the loan market, by using data on loan prices. We find no improvement in banking competition during the transition period. Second, we investigate the relationship and the causality between competition and efficiency. We perform a Granger-causality-type analysis which supports a negative causality only running from competition to efficiency. Therefore, our results reject the intuitive 'quiet life' hypothesis and indicate a negative relationship between competition and efficiency in banking.

Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring the 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 at providing evidence on the effects of banking competition in the Czech Republic. First, we measure the level and the evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, by using data on loan prices. We find no improvement in banking competition during the transition period. Second, we investigate the relationship and the causality between competition and efficiency. We perform a Granger-causality-type analysis which supports a negative causality only running from competition to efficiency. Therefore, our results reject the intuitive 'quiet life' hypothesis and indicate a negative relationship between competition and efficiency in banking.

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996-2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999-2001 than in the period 1996-1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996-1998: I find cross-sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999-2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel. Copyright (c) 2007 The Author Journal compilation (c) 2007 The European Bank for Reconstruction and Development .

Bank failures, Management, Cost efficiency, Transition economy, G2, C1,