Market entry, privatisation and Market entry, privatisation and bank performance in transition bank performance in transition Steven Fries, Damien Neven, Steven Fries, Damien Neven, Paul Seabright and Anita Taci Paul Seabright and Anita Taci EIASM Workshop on Financial Development EIASM Workshop on Financial Development Prague, 26 May 2006 Prague, 26 May 2006
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EIASM Workshop on Financial Development Prague, 26 May 2006
Market entry, privatisation and bank performance in transition Steven Fries, Damien Neven, Paul Seabright and Anita Taci. EIASM Workshop on Financial Development Prague, 26 May 2006. Introduction. Many policies used to change socialist banking systems into market-oriented ones, including - PowerPoint PPT Presentation
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Market entry, privatisation and bank Market entry, privatisation and bank performance in transitionperformance in transition
Steven Fries, Damien Neven, Steven Fries, Damien Neven, Paul Seabright and Anita TaciPaul Seabright and Anita Taci
EIASM Workshop on Financial DevelopmentEIASM Workshop on Financial DevelopmentPrague, 26 May 2006Prague, 26 May 2006
IntroductionIntroduction
Many policies used to change socialist banking systems into market-oriented ones, including
– Restructuring and privatisation of state banks
– Entry of new private banks, including foreign
Gauge impact of reforms on banking development by examining revenue and costs
– Foreign banks are low marginal cost entrants
– Privatised banks attract greater demand
– Differences among private banks diminish over time
– State banks under perform on both demand and costs
Approach of the paperApproach of the paper
Develop unique model of monopolistic competition in bank lending and deposit taking to analyse revenues– Look for effects of market entry and ownership on
deposit and loan margins Use standard trans-log specification for costs
– Estimate marginal costs by ownership type Compare margins and marginal costs for mark-ups
– Indicates ability to attract demand for loans and deposits Allow parameters of revenues and costs to vary
over time
Existing literatureExisting literature
Banking market structures in transition economies (TEs)
– Gelos and Roldós (2002), Yildirim and Philippatos (2002a) and Drakos and Konstantinou (2003)
– Evidence of monopolistically competitive markets
– Increasing competition over time Cost / profit efficiency of banks in TEs
– Grigorian and Manole (2002), Yildirim and Philippatos (2002b), Bonin, Hasan and Wachtel (2005) and Fries and Taci (2005)
– Greater efficiency of foreign banks
Existing literature (cont’d)Existing literature (cont’d)
Determinants of bank net interest margins in TEs
– Drakos (2003)
– State-owned banks have relatively low margins
Theoretical models of imperfect competition and institutional development in TEs
– Hainz (2003a, 2003b)
– Studies show that the market power of banks decreases as the quality of institutions improves
The starting point: bank profit functionThe starting point: bank profit function
Accounting identity
LoanLoanmarginmargin
DepositDepositmarginmargin
Non-loan assetsNon-loan assetsmarginmargin
Operating costsOperating costs
Interbank rateInterbank rate
ii r riillLLii - r - rii
ddDDii + r + riinnNNii - R(L - R(Lii + N + Nii - E - Eii - D - Dii) - C(D) - C(Dii,N,Nii,L,Lii,W,Wii))