Market structure in banking and the bank lending channel: evidence from the bank-level data in Asian and Latin American countries

Yuan Li

doi:10.17918/etd-3137

The market structure of the global banking sector has changed dramatically in recent years. Since the mid-1990s, Asian and Latin American countries have experienced deregulation, foreign bank penetration, and an accelerated process of consolidation and competition in the banking sector. This thesis examines how the recent changes in concentration and competition in Asian and Latin American banking sectors have affected the monetary policy transmission mechanism, while specifically focusing on the bank lending channel. The first essay examines the relationship between increased consolidation in banking and the bank lending channel of monetary policy in 20 Asian and Latin American countries, using unique bank-level panel data for the period from 1996 to 2006. The estimation results provide consistent evidence that as concentration in banking increases, the bank lending channel weakens, causing monetary policy to be less effective. This is found to be true even after accounting for the effects brought by changes in loan demand and financial constraints faced by individual banks of varying size, liquidity and capitalization. To my knowledge, this study is the first to use bank-level balance sheets and income statement data to study this issue at a global scale. Doing so enables this study to contribute to the literature in two different ways. First, the effects of the supply-side bank lending channel from those of the demand-side interest rate channel can be identified more accurately. Second, any systematic differences in the impact of consolidation in banking on the monetary policy transmission mechanism across banks of different types and levels of financial strength can be tested properly. This essay also discusses potential explanations for the findings that increased consolidation reduces the sensitivity of bank lending to changes in monetary policy shocks. The second essay examines the evolution of banking competition and how banking competition affects the transmission of monetary policy through the bank lending channel. I use annual bank-level panel data for commercial banks of 10 Asian and 10 Latin American countries from 1996 to 2006. A two-step estimation procedure is applied. In the first step, the degree of banking competition in each country and year is measured using the methodology proposed by Panzar and Rosse (1987). The result shows that the banking sector in these emerging economies has experienced a significant increase in competition. In the second step, the empirical results on the loan equation provide consistent evidence that increase in banking sector competition has weakened the transmission of monetary policy through the bank lending channel in the Asian and Latin American countries. It is found that overall, banking competition is higher in Latin America than in Asia and the bank lending channel is weaker in Latin America than in Asia. The third essay investigates the relationship between banking concentration and competition. According to the traditional structure-conduct-performance paradigm, greater concentration results in less competition in the banking industry. On the contrary, the efficiency structure hypothesis indicates that higher concentration may cause banks to become more efficient and competitive. Additional factors such as foreign bank penetration, information technology, and asymmetric information may also affect banking competition. Furthermore, the measurement issue could also contribute to the contradictory relationship between the two. In the literature, banking concentration is measured as the market share held by the largest banks using the Herfindahl index, the concentration ratio CR3 (the largest 3 banks share of assets) and CR5 (the largest 5 banks share of assets), while banking competition is often measured as a bank's ability to affect the price in the market for bank loans using the Panzar and Rosse approach. This paper studies this issue empirically using aggregate panel data on the banking industry and macroeconomic environments from a total of 14 Asian and Latin American countries during the period from 1996 to 2006. The empirical results provide evidence that banking concentration reduces banking competition in the Asian and Latin American countries for our sample period.

Market structure in banking and the bank lending channel: evidence from the bank-level data in Asian and Latin American countries

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Market structure in banking and the bank lending channel: evidence from the bank-level data in Asian and Latin American countries

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