Does Competition Cause Stability in Banks? SFA and GMM Application to Sub-Saharan Africa Commercial Banks
Keywords:
Competition, Stability, Efficiency, Stochastic Frontier Analysis, Commercial Banks
Abstract
Investigating the competition-stability view in relation to the banking sector, the intention behind this study was to find out how far efficiency is associated with a competitive banking environment and if it warrants the continued agitation towards fostering increased competition in banking markets around the world. This view has significant support in spite of the potential instability that could possibly result from risk appetite, which the competition-fragility view holds to be associated with competition. We employed a stochastic frontier analysis (SFA) to model an instrumental variable of competition resulting from increased efficiency or inefficiency due to bank-level competition, which we used in the regression of competition against stability using the generalized method of moments (GMM). We found that competition increased the efficiency of the banking sector over the study period. The regression results of our instrument against stability in the Sub-Saharan Africa region was found to be positive and strongly significant with stability providing evidence of transmission from competition to efficiency to stability, and, hence consistent with competition-stability views. Our conclusion is that while competition is desirable, it must be optimized to enhance efficiency without which the effects become detrimental. Therefore, there must be ongoing regulation to check excessive competition.
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References
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Casu, B., Girardone, C. & Molyneux, P. (2012). 3 Is there a conflict between competition and financial stability? Research Handbook on International Banking and Governance, 72. Retrieved from https://books.google.co.za/books?id=Y8O4tK-iOnoC&lpg=PA72&ots=vYxWMejj5a&dq=is%20there%20a%20conflict%20between%20competition%20and%20financial%20stability%3F&lr&pg=PA72#v=onepage&q=is%20there%20a%20conflict%20between%20competition%20and%20financial%20stability?&f=false Casu, B., Girardone, C. & Molyneux. (2015). Introduction to banking (second ed.). United Kingdom: Pearson Education Limited. Çeli̇k, T., Kaplan, M. & Şahi̇n, F. (2015). Efficiency, Concentration and Competition in the Turkish Banking Sector. Iktisat Isletme ve Finans, 30(346), 81-104. Chiou, W. J. P. & Porter, R. L. (2015). Does bank capital reduce risk? An application of Stochastic Frontier Analysis and GMM approach. c.-F. Lee, J. Lee (eds), Handbook of Financial Econometrics and Statistics, 246-381. Chirwa, E. W. (2003). Determinants of commercial banks' profitability in Malawi: a cointegration approach. Applied Financial Economics, 13(8), 565-571.
Chudik, A. & Pesaran, M. H. (2013). Large panel data models with cross-sectional dependence: a survey. CAFE Research Paper. SSRN Electronic Journal. doi:10.2139/ssrn.2316333 Chudik, A., Pesaran, M. H. & Tosetti, E. (2011). Weak and strong crossâ€section dependence and estimation of large panels. The Econometrics Journal, 14(1), C45-C90.
ÄŒihák, M., Demirgüç-Kunt, A., PerÃa, M. S. M. & Mohseni-Cheraghlou, A. (2012). Bank Regulation and Supervision Around the World: A Crisis Update. World Bank Policy Research Working Paper, No. 6286. Retrieved from http://ssrn.com/abstract=2185819 Coelli, T. J. (1996). A guide to FRONTIER version 4.1: a computer program for stochastic frontier production and cost function estimation. Retrieved from ucema.edu.ar Coelli, T. J., Rao, D. S. P., O'Donnell, C. J. & Battese, G. E. (2005). An introduction to efficiency and productivity analysis: Springer Science & Business Media. de Guevara, J. F. & Maudos, J. (2011). Banking competition and economic growth: Cross-country evidence. The European Journal of Finance, 17(8), 739-764.
Demirguc-Kunt, A. & Detragiache, E. (1997). The determinants of banking crises: evidence from industrial and developing countries. Retrieved from https://doi.org/10.1596%2F1813-9450-1828 Dietsch, M. (1993). Localisation et concurrence dans la banque. Revue economique, 3, 779-790. Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society. Series A (General), 120(3), 253-290. Fernandez de Guevara, J., Maudos, J. & Perez, F. (2005). Market power in European banking sectors. Journal of Financial Services Research, 27(2), 109-137. Flamini, V., Schumacher, M. L. & McDonald, M. C. A. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa. IMF Working Papers, 9(15). doi:10.5089/9781451871623.001 Fu, X. M., Lin, Y. R. & Molyneux, P. (2014). Bank competition and financial stability in Asia Pacific. Journal of Banking & Finance, 38, 64-77. Gatev, E., Schuermann, T. & Strahan, P. E. (2009). Managing bank liquidity risk: How deposit-loan synergies vary with market conditions. Review of Financial Studies, 22(3), 995-1020.
Genetay, N., Lin, Y., Molyneux, P. & Fu, X. M. (2015). Bank Competition, Efficiency and Liquidity Creation in Asia Pacific: Springer. Retrieved from https://doi.org/10.1057/9781137533845_2 Hamilton, J. D. (1994). Time series analysis (Vol. 2): Princeton university press Princeton. Hughes, J., Mester, L. & Moon, C. (2001). Are scale economics in banking elusive or illusive? Evidence obtained by incorporating capital structure and risk into models of bank production. Journal of Banking and Finance, 25. doi:10.2139/ssrn.237812
Hughes, J. P. & Mester, L. J. (2013). Measuring Performance of Banks: Theory, Practice, Evidence and Some Policy Implications Retrieved from http://ssrn.com/abstract=2306003. Retrieved 3rd September, 2014 http://ssrn.com/abstract=2306003 Hughes, J. P., Lang, W. W., Mester, L. J., Moon, C. G. & Pagano, M. S. (2003). Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance. Journal of Banking & Finance, 27(3), 417-447. Hussain, M. E. & Hassan, M. K. (2012). Competition, Risk Taking and Efficiency in the US Commercial Banks Prior to 2008 Financial Crisis. Available at SSRN 2003066. Jondrow, J., Lovell, C. K., Materov, I. S. & Schmidt, P. (1982). On the estimation of technical inefficiency in the stochastic frontier production function model. Journal of Econometrics, 19(2), 233-238. Kao, C. & Liu, S. T. (2009). Stochastic data envelopment analysis in measuring the efficiency of Taiwan commercial banks. European Journal of Operational Research, 196(1), 312-322. Khan, F., Muneer, S. & Anuar, M. A. (2013). Relationship between stock prices and economic variables: Sectoral analysis. Actual Problems of Economics, 143, 544–553
Kouki, I. & Al-Nasser, A. (2014). The implication of banking competition: Evidence from African countries. Research in International Business and Finance. doi:http://dx.doi.org/10.1016/j.ribaf.2014.09.009 Kumbhakar, S. C. & Lovell, C. K. (2003). Stochastic frontier analysis: Cambridge University Press.
Laeven, L. & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275. doi:http://dx.doi.org/10.1016/j.jfineco.2008.09.003
Léon, F. (2015). What do we know about the role of bank competition in Africa Retrieved from http://cerdi.org/production/show/id/1695/type_production_id/1. Retrieved 27 August 2015 http://cerdi.org/production/show/id/1695/type_production_id/1
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Published
2017-09-04
How to Cite
Akande, J. O., & Kwenda, F. (2017). Does Competition Cause Stability in Banks? SFA and GMM Application to Sub-Saharan Africa Commercial Banks. Journal of Economics and Behavioral Studies, 9(4(J), 173-186. https://doi.org/10.22610/jebs.v9i4(J).1832
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Research Paper
Copyright (c) 2017 Joseph Olorunfemi Akande, Farai Kwenda
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