Revisiting the Quiet Life Hypothesis in Banking Using Nonparametric Techniques

Färe, Rolf; Grosskopf, Shawna; Maudos, Joaquı́n; Tortosa‐Ausina, Emili

doi:10.3846/16111699.2012.726929

Cited by 26 publications

(20 citation statements)

References 62 publications

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“…It can be computed using the relative difference between price and marginal cost. The Lerner index usually ranges from 0 to 1 with higher figures indicating higher levels of market power and lower competition levels, while lower figures underline that there is a lower market-power level and a higher degree of competition (Fare et al, 2015;Fungacova et al, 2013;Tan & Floros, 2014;Tan, 2016;among others). In some scenarios, the value of the Lerner index can be negative.…”

Section: Lerner (1934) Indexmentioning

confidence: 99%

Unveiling endogeneity between competition and efficiency in Chinese banks: a two-stage network DEA and regression analysis

2021

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Although there is a growing number of research articles investigating the performance in the banking industry, research on Chinese banking efficiency is rather focused on discussing rankings to the detriment of unveiling its productive structure in light of banking competition. This issue is of utmost importance considering the relevant transformations in the Chinese economy over the last decades. This is a development of a two-stage network production process (production and intermediation approaches in banking, respectively) to evaluate the efficiency level of Chinese commercial banks. In the second stage regression analysis, an integrated Multi-Layer Perceptron/Hidden Markov model is used for the first time to unveil endogeneity among banking competition, contextual variables, and efficiency levels of the production and intermediation approaches in banking. The competitive condition in the Chinese banking industry is measured by Panar–Rosse H-statistic and Lerner index under the Ordinary Least Square regression. Findings reveal that productive efficiency appears to be positively impacted by competition and market power. Second, credit risk analysis in older local banks, which focus the province level, would possibly be the fact that jeopardizes the productive efficiency levels of the entire banking industry in China. Thirdly, it is found that a perfect banking competition structure at the province level and a reduced market power of local banks are drivers of a sound banking system. Finally, our findings suggest that concentration of credit in a few banks leads to an increase in bank productivity.

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Section: Lerner (1934) Indexmentioning

confidence: 99%

Unveiling endogeneity between competition and efficiency in Chinese banks: a two-stage network DEA and regression analysis

2021

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“…However, different from our test, Berger and Hannan (1998) do not explicitly examine the ES hypothesis. 7 More recent studies focus on the relationship between market power (not necessarily market structure) and firm efficiency, by employing elaborate methodologies using various market power measures (e.g., Maudos and de Guevara 2007, Turk Ariss 2010, Schaeck and Chihak 2010, Färe et al 2011, and Koetter et al 2012. However, similar to Berger and Hannan (1998), these studies are only interested in the impact of market power on firm efficiency, and do not test the ES hypothesis as we do in this paper.…”

Section: Other Related Studiesmentioning

confidence: 99%

Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis

Homma

Tsutsui

Uchida

2014

Journal of Banking & Finance

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In this paper we propose a new test of the efficient structure (ES) hypothesis, which predicts that efficient firms come out ahead in competition and grow as a result. Our test has significant advantages over existing ones, because it is more direct, and can jointly test the so-called quiet-life hypothesis, which predicts that in a concentrated market firms do not minimize costs. We then apply this test to large banks in Japan. Consistent with the ES hypothesis, we find that more efficient banks become larger. We also find that market concentration reduces banks' efficiency, which supports the quiet-life hypothesis. These findings imply that there is an intriguing growth-efficiency dynamic throughout banks' life cycle, although our findings also suggest that the ES hypothesis dominates the quiet-life hypothesis in terms of economic impact.

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“…From the above literature, the scholarly emphasis has been inconclusive and mixed, at least, in developed economies. Färe et al (2015) pointed out that these variations were due to the level of market power, the component of efficiency evaluated (cost, I n t e r n a t i o n a l J o u r n a l o f M a n a g e r i a l F i n a n c e 8 technical or allocative) and the type of banking firm (commercial bank or savings bank), suggesting that the quiet life might be a reality only for some financial institutions.…”

Section: Cost Efficiency and Welfare Gainmentioning

confidence: 99%

Cost efficiency and welfare performance of banks: evidence from an emerging economy

Adeabah

Andoh

2020

IJMF

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PurposeThe study examines the relationship between the consequential social cost of market power (i.e. welfare performance of banks) and cost efficiency using data covering the period 2009 to 2017 from the Ghanaian banking industry.Design/methodology/approachThe study adopts the ordinary least squares (OLS), fixed effect (FE) panel regression and the quantile regression (QR) approaches to control for heterogeneity and provide increased room for policy relevance. The two-stage least squares instrumental variables (2SLS-IV) regression is used to ensure the robustness of the findings against the problem of possible reverse causality.FindingsThe results indicate a positive relationship between banks' welfare performance and cost efficiency, which suggests that greater cost efficiency hedges welfare losses. In other words, welfare gains and cost-efficient banks are not mutually exclusive. Also, the results show evidence that the sensitivity of welfare gain to cost efficiency depends on the knowledge of local market dynamics. Further, the findings from the QR estimation suggest that, but for welfare loss at low (Q.25) to the median (Q.50) quantiles, cost efficiency is a necessary and sufficient condition to hedge the welfare losses.Practical implicationsThe results demonstrate that financial consumer protection cannot be achieved without cost efficiency in the presence of both foreign banks and high market knowledge. Therefore, our paper suggests an integrated cost efficiency policy approach that has the complementary effect of a robust information sharing mechanism and incentives to hedge against welfare losses in the banking sector of emerging economies. Moreover, if welfare gain is synonymous with cost-efficient banks, then the presence of a quiet life is typical of financial consumer protection.Originality/valueThis study provides insight into the importance of cost efficiency to the public policy of financial consumer protection in an era of foreign banks' dominance. From the review of prior literature, this paper is the first to apply the QR estimation technique to examine the effect of cost efficiency throughout the conditional distribution of bank welfare performance rather than just the conditional mean effect of cost efficiency.

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Revisiting the Quiet Life Hypothesis in Banking Using Nonparametric Techniques

Abstract: Early studies testing the quiet life hypothesis in banking found

Cited by 26 publications

References 62 publications

Unveiling endogeneity between competition and efficiency in Chinese banks: a two-stage network DEA and regression analysis

Unveiling endogeneity between competition and efficiency in Chinese banks: a two-stage network DEA and regression analysis

Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis

Cost efficiency and welfare performance of banks: evidence from an emerging economy

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