Foreign banks, profits, market power and efficiency in PICs: some evidence from Fiji

Abstract

Studies on bank profitability vis-à-vis market power and efficiency span a number of years, many countries, regions and methods. Yet, the experiences of the Pacific's small states-where foreign banks are widespread and bank profits relatively high-are still not known, leaving policy makers ill-informed regarding relevant policy development. Ironically, it is here that these relationships need to be more appropriately understood so that the much desired finance-led growth aspirations may be more effectively achieved. This study fills a huge gap in literature by providing fresh evidence on the issue of market power and efficiency vis-à-vis bank profitability in a Pacific island context. Two market power hypotheses-the Structure-Conduct-Performance (SCP) and the Relative-Market-Power (RMP) hypotheses together with two measures of the Efficient-Structure (ES)-X-and scale efficiencies are estimated. The non-parametric DEA technique is used to estimate efficiency scores for banks in Fiji over the 2000-2010 period and the dynamic GMM to estimate the relationships between market power and efficiency vis-à-vis profitability. Results show that the RMP and ES theories might hold but not the SCP. Profits appear to persist over time. Policy implications are considerable including that any suggestions to limit further mergers and acquisitions of banks in the region may have to be properly debated.

Geographic loan diversification and bank risk: A cross-country analysis

“…more liquid assets tend to have a lower profit. This is comparable with the findings of Sharma et al (2013) that more funds invested in cash or cash equivalents tend to reduce liquidity premium in bank margin given the low return relative to other assets. 9…”

Intellectual capital and bank profitability: New evidence from Vietnam

“…Thus, a signaling equilibrium may exist where banks that expect to have better future performance will exhibit a greater level of capital (Saona, 2016). Several studies, however, emphasize that a bank with an excessively high capital ratio is operating over-cautiously and ignoring opportunities for profitable growth (Berger, 1995;Sharma et al, 2013). LATA, the ratio of liquid assets to total assets, is used to control for liquidity risk (Le, 2017b;Sharma et al, 2013).…”

“…Several studies, however, emphasize that a bank with an excessively high capital ratio is operating over-cautiously and ignoring opportunities for profitable growth (Berger, 1995;Sharma et al, 2013). LATA, the ratio of liquid assets to total assets, is used to control for liquidity risk (Le, 2017b;Sharma et al, 2013). Several studies claim banks that hold more liquid assets tend to have a lower profit (Sharma et al, 2013).…”

“…LATA, the ratio of liquid assets to total assets, is used to control for liquidity risk (Le, 2017b;Sharma et al, 2013). Several studies claim banks that hold more liquid assets tend to have a lower profit (Sharma et al, 2013). Other studies, however, argue that an increase in the relative liquid assets holdings of banks decreases its probability of default-thus, improving bank profits (Bordeleau & Graham, 2010;Bourke, 1989).…”

Technical efficiency of banking institutions in a Pacific Island Country: a distance function stochastic frontier analysis*

“…For a population of less than one million, scattered across more than 300 islands, Fiji has a relatively diverse financial system, made up of commercial banks, insurance companies, credit institutions, a housing authority, a development bank, unit trusts, credit unions, financial cooperatives, microfinance institutions, and others . Reforms too have been extensive, including the adoption of several BIS proposed guidelines such as capital adequacy, loan classifications, liquidity management, as well as substantial revision of the banking act (Sharma et al, 2013). In addition to the socio-economic characteristics of PICs mentioend above, a series of miliatary coup d'état coupled on hand and a rich banking history dating back to 1873 and the constant presence of foreign banks, dominated by Australian, on the other, makes the Fijian study interesting.…”