Does deregulation make markets more competitive? Evidence of mark-ups in Spanish savings banks

Abstract

Modelling and testing whether competitive pressures driven by deregulatory changes make markets more competitive are examined. Departures from competitive markets are modelled via mark-up prices. Empirically, a panel data is used on Spanish savings banking industry that is undergoing unprecedented changes caused by the deregulation of financial services, the establishment of the economic and monetary union and developments in information technology. Evidence of mark-ups in output markets is found, and such mark-ups are found to decline slowly over time. This finding suggests that the presence of deregulatory pressures improved the competitive strength of the Spanish savings banks.

Deregulation and Productivity: The Case of Spanish Banks

“…(Carbó and Humphrey 2001) found that branch deregulation was the driving force in improving competition among savings bank in Spain during 1986-1998. (Kumbhakar and Lozano-Vivas 2004) found that markup in loan services has decreased over time making Spanish savings banks more and more competitive over time.…”

Banks as firms’ blockholders: a study in Spain

“…The decline in interest rates, as a result of the convergence to the EMU and deregulation (Kumbhakar and Lozano, 2004), has resulted in a decline in the spread between lending and borrowing rate, which has put pressure on banks to converge and improve their efficiency (Lozano, 1998) and create value (Guzma´n and Reverte, 2008). In 1990, this spread was 5.5 percentage points, whereas by the year 2000, the spread was only 3 percentage points.…”

The effect of Euribor on banking profitability: evidence from the Spanish banking system

“…Since banks reprice liabilities faster than assets, this allows the difference between the lending and the deposit rate to increase when Euribor falls. Kumbhakar & Lozano-Vivas (2004) find that the deposit market is less competitive than the loan one, which therefore makes the effect of a change in interest rates on liabilities to be greater. This is due to the existence of switching costs (Klemperer, 1987), by which consumers do not change bank in the case of a drop in deposit rates because they are linked to the firm via asset products, or just because the volume of their deposits does not compensate the transaction costs of opening a new account elsewhere (Kim et al, 2003).…”