Testing for competition in the South African banking sector

Simbanegavi, Witness and Greenberg, Josh and Gwatidzo, Tendai (2012): Testing for competition in the South African banking sector.

Abstract

This paper employs the Panzar and Rosse (1987) and the Bresnahan models to determine the level of competition in the South African banking sector. This level of competition was tested during the period 1998 to 2008 for the Panzar and Rosse approach and from 1992 to 2008 for the Bresnahan model. We �find evidence of monopolistic competition in the South African banking sector. Our fi�ndings are consistent with those of Bikker et al (2012) for South Africa.

• Item Type: MPRA Paper
• Language: English
• Keywords: banking industry; competition; South Africa; Panzar-Rosse model; Bresnahan model
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

[1] Albaek, S., Mollgaard, P. and Overgaard, Per B., (2003). Government Assisted Oligopoly Coordination? A Concrete Case. Journal of Industrial Economics 45(4), 429-443.

[2] Bain, J. (1951). Relation of Pro�t Rate to Industry Concentration. Quarterly Journal of Economics, No. 65 , 293-324.

[3] Baumol, W. (1982). Contestable Markets: An Uprising in the Theory of Industry Structure. American Economic Review, Vol. 72 , 1-15.

[4] Berger, A.N. (1995). The Pro�t-Structure Relationship in Banking Tests of Market Power and E¢ cient-Structure Hypothesis. Journal of Money, Credit, and Banking 27, 404-431.

[5] Berger, A.N, & Hannan, T. (1989). The Price-Concentration Relationship in Banking. The Review of Economics and Statistics, No. 71, 291-299.

[6] Bikker, J.A., (2003). Testing for imperfect competition on EU deposit and loan markets with Bresnahan�s market power model, Research Series Supervision (discontinued) 52, Netherlands Central Bank, Directorate Supervision.

[7] Bikker, J., & Haaf, K. (2001). Measure of Competition and Concentration: A Review of the Literature. De Nederlandsche Bank Research Supervision Studies, No. 27.

[8] Bikker, J., & Haaf, K. (2002). Competition, Concentration and their Relationship: An Empirical Analysis of the Banking Industry. Journal of Banking & Finance, Elsevier, Vol. 26(11) , 2191-2214.

[9] Bikker, J.A., Sha¤er, S., and Spierdijk, L., (2012). Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium. Forthcoming, Review of Economics and Statistics.

[10] Bresnahan, T. (1982). The Oligopoly Solution Concept is Identi�ed. Economics Letters 10 , 87-92.

[11] Claessens, S., & Laeven, L. (2004). What Drives Bank Competition? Some International Evidence. Journal of Money, Credit and Banking, Vol. 36, No. 3, 563-583.

[12] Claessens, S., & Laeven, L. (2005). Financial Dependence, Banking Sector Competition, and Economic Growth. Journal of the European Economic Association, Vol. 3, No. 1, 179-207.

[13] Competition Commission. (2000). Mergers and Acquisitions Report. Nedcor Limited and Standard Bank Investment Corporation Limited.

[14] Demsetz, H. (1973). Industry Structure, Market Rivalry and Public Policy. Journal of Law and Economics, No. 3 , 1-9.

[15] Duncan, D. (2003). Testing for Competition in the Jamaican Banking Sector: Evidence from Bank Level Data. Financial Stability Unit - Bank of Jamaica.

[16] Engle, R., & Granger, C. (1987). Cointegration and Error Correction: Representations, Estimation and Testing. Econometrica , 252-276.

[17] Falkena, H. et al.. (2004). Competition in South African Banking. Task Group Report - The National Treasury and The South African Reserve Bank.

[18] Iwata, G. (1974). Measurement of Conjuctural Variations in Oligopoly. Econometrica, No. 42 , 947-966.

[19] Jali, T., Nyasulu, H., Bodibe, O., & Petersen, R. (2008). Banking Enquiry. Competition Commission.

[20] Kot, A. (2004). Is interest rate pass-through related to banking sector competitiveness? Working paper, National Bank of Poland.

[21] Lau, L. (1982). On Identifying the Degree of Competitiveness from Industry Prices and Output Data. Economics Letters 10 , 93-99.

[22] Mullineux, A., & Sinclair, P. (2000). Oligopolistic Banks: Theory and Policy Implications. Unpublished.

[23] Murjan, W., & Ruza, C. (2002). The Competitive Nature of the Arab Middle Eastern Banking Market. International Advances in Economic Research, Vol. 8, Iss. 4 , 267-273.

[24] Nathan, A., & Neave, E. (1989). Competition and Contestability in Canada�s Financial System: Empirical Analysis. Canadian Journal of Economics Vol. 22, Iss. 3 , 576-594.

[25] Okeahalam, C. (1998). An Analysis of the Price-Concentration Relationship in the Botswana Commercial Banking Industry. Journal of African Finance and Economic Development, No. 3 , 65-84.

[26] Okeahalam, C. (2001). Structure and Conduct in the Commercial Banking Sector of South Africa. Presented at TIPS 2001 Annual Forum.

[27] Panzar, J.C., & Rosse, J.N., (1987). Testing for �Monopoly� Equilibrium. The Journal of Industrial Economics. Vol. 35, No. 4 , 443-456.

[28] Perera, S., Skully, M., & Wickramanayake, J. (2006). Competition and Structure of South Asian Banking: A Revenue Behavior Approach. Applied Financial Economics 16 , 789-901.

[29] Reserve Bank. (2008b). Registered Banks - Foreign Con- trolled. Retrieved Januray 2008, from Reserve Bank Website: http://www2.resbank.co.za.

[30] Reserve Bank. (2008a). Registered Banks - Locally Con- trolled. Retrieved January 2008, from Reserve Bank Website: http://www2.resbank.co.za.

[31] Reserve Bank. (2008c). Registered Mutual Banks. Retrieved January 2008, from Reserve Bank Website: http://www2.resbank.co.za.

[32] Rosse, J.N., and Panzar, J.C., (1977). Chamberlin vs Robinson: An empirical study for monopoly rents. Bell Laboratories Economic Discussion Paper, No. 90.

[33] Schmalensee, R., (1989). Interindustry studies of structure and performance. In Schmalensee, R. and Willig, R. D. (eds.) Handbook of Industrial Organization, Vol. II. North-Holland, Amsterdam.

[34] Sha¤er, S. (1982). A Non-Structural Test for Competition in Financial Markets. Bank Structure and Competition Conference Proceedings. Federal Reserve Bank of Chicago , 255-243.

[35] Shaffer, S. (1989). Competition in the U.S. Banking Industry. Economics Letters 29 , 321-323.

[36] Shaffer, S. (1993). A Test of Competition in Canadian Banking. Journal of Money, Credit and Banking, Vol. 25(1) , 49-61.

[37] Shaffer, S. (2001). Banking conduct before the European single banking lisence: A cross-country comparison. North American Journal of Economics and Finance, Vol. 12, 79-104.

[38] Sha¤er, S. (2004). Patterns of competition in banking. Journal of Economics and Business, Vol. 56, 287-213.

[39] Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, MA: The MIT Press.

[40] Van Leuvensteijn, M., Kok-Sørensen, C., Bikker, J., & Van Rixtel, A. (2008). Impact of Bank Competition on the Interest Rate Pass-Through in the Euro Area. Working Paper Series, No. 885 - European Central Bank.