Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in L478--------dc21 ©2003Inter-American Development Bank 1300 New York Avenue, N.W. Washington, DC 20577The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf.The Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res 4 Abstract 1 In recent years, Latin American banking sectors have experienced an accelerated process of concentration and foreign penetration that has prompted diverse views regarding its implications for the competitive behavior of banks and for the financial stability of the system as a whole. Exploiting a rich bank-level balance sheet database for eight Latin American countries, we examine the evolution of concentration and foreign penetration indicators and their impact on competition and risk. We find that, while concentration did not reduce competition in the industry, foreign penetration appears to have led to less competitive banking sectors. Moreover, we find banking sector fragility to be positively related to competition and, through this channel, negatively related to foreign participation, despite the fact that foreign banks in the region are associated with higher insolvency risk due to higher leverage ratios and more volatile returns.

Competition and Concentration in the New European Banking Landscape

“…This is consistent with the findings of previous studies (i.e. Molyneux et al, 1994;Hondroyiannis et al, 1999;Bikker and Haaf, 2002b;Yeyati and Micco, 2003;Gelos and Roldos, 2004;Coccorese, 2004). Moreover, its coefficient becomes 17 In the descriptive statistics we mentioned the high level of interest income that these EU-10 countries present in the period examined.…”

“…In addition, the equation of our specification includes on the right hand side a set of bank-specific variables that reflect differences in risks, banks' production function and deposit mix to allow for bank heterogeneity, and should, at least from a theoretical point of view, stem from the marginal revenue and cost functions underlying the empirical equation. These variables are the ratio of loans to total assets (Molyneux et al, 1996;DeBandt and Davis, 2000;Bikker and Groeneveld, 2000;Bikker and Haaf, 2002b;Yildirim and Philippatos, 2002;Yeyati and Micco, 2003;Gelos and Roldos, 2004;Coccorese, 2004 etc. ), the ratio of equity to total assets (Nathan and Neave, 1989;Barajas et al, 2000;Bikker and Groeneveld, 2000;Bikker and Haaf, 2002b;Hempell, 2002;Yildirim and Philippatos, 2002;Yeyati and Micco, 2003;Coccorese, 2004 etc.…”

“…These variables are the ratio of loans to total assets (Molyneux et al, 1996;DeBandt and Davis, 2000;Bikker and Groeneveld, 2000;Bikker and Haaf, 2002b;Yildirim and Philippatos, 2002;Yeyati and Micco, 2003;Gelos and Roldos, 2004;Coccorese, 2004 etc. ), the ratio of equity to total assets (Nathan and Neave, 1989;Barajas et al, 2000;Bikker and Groeneveld, 2000;Bikker and Haaf, 2002b;Hempell, 2002;Yildirim and Philippatos, 2002;Yeyati and Micco, 2003;Coccorese, 2004 etc. ), the ratio of loan loss provisions to total loans (Nathan and 8 From a comparative perspective, the existence of accounting differences across countries is an additional argument in favour of having a more comprehensive view of bank revenue.…”

“…Neave, 1989;Hondroyiannis et al, 1999;Bikker and Haaf, 2002b;Hempell, 2002 etc. ), and the ratio of bank deposits to customer and short-term funding, the latter to account for differences in deposit mix (Molyneux et al, 1996;DeBandt and Davis, 2000;Bikker and Haaf, 2002b;Yildirim and Philippatos, 2002;Yeyati and Micco, 2003;Gelos and Roldos, 2004;Coccorese, 2004 etc.). We also include the ratio of other income to total assets to account for the influence of the generation of other income on the model's underlying marginal revenue and cost functions 12 (Bikker and Groeneveld, 2000;Bikker and Haaf, 2002b;Yeyati and Micco, 2003 etc.…”

“…From a global perspective, there are additional reasons why market conditions in the banking industry deserve particular attention. The soundness and stability of the financial sector may in various ways be influenced by the degree of competition and concentration (Yeyati and Micco, 2003). Enhanced competition may have a deleterious impact on stability if it causes banks' charter value to drop, thus reducing the incentives for prudent risk-taking behaviour.…”