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DEREGULATION, BANK COMPETITION, AND REGIONAL GROWTH
Santiago Carbó Valverde*
Departamento de Economía Aplicada
Universidad de Granada
Granada, Spain
David B. Humphrey
Department of Finance
Florida State University
Tallahassee, FL U.S.A.
Francisco Rodríguez Fernández
Departamento de Economía Aplicada
Universidad de Granada
Granada, Spain
* Corresponding author: Santiago Carbó Valverde
Area de Fundamentos del Análisis Económico
Departamento de Economía Aplicada
Facultad de CC. EE. y Empresariales
UNIVERSIDAD DE GRANADA
Campus de Cartuja s/n
E-18071 GRANADA
SPAIN
Tel: 34 958 24 37 17
Fax: 34 958 24 40 46
e-mail: scarbo@ugr.es
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ABSTRACT: Cross-country studies suggest that countries with greater financial sector
competition have higher rates of economic growth. However, it is difficult to “hold constant”
different legal and cultural environments in these analysis, leading some to suggest that this
relationship is due less to competition than to differing legal and cultural conditions which favor
economic growth. As these differences are small within a country, an interregional analysis may
reflect better the relationship between financial market competition and growth. We study five
large regions in Spain over 1986-1998. Using different indicators of market competition,
financial sector deregulation has improved regional competition. However, using Grangercausality tests, greater competition is not also associated with improved regional growth.
Although deregulation raised deposit rates and lowered loan rates, these benefits have not also
markedly influenced regional growth. The positive relationship shown between competitive
markets and growth in cross-country studies may instead be due to some unspecified third
factor that influences both.
JEL: G12, R51, R11
KEY WORDS: deregulation, market competition, regional growth, Granger-causality.
-3DEREGULATION, BANK COMPETITION, AND REGIONAL GROWTH
1. Introduction.
The pace of regional or national economic growth is influenced by the ability of financial
firms to mobilize domestic savings and intermediate these funds into loans to businesses who
turn them into productive capital. An expected corollary to this proposition has been that
competitive financial markets would improve this intermediation process. In competitive
markets, banks pay a higher return on savings (increasing their level) and reduce the cost of
loans (generating more loans and productive capital investment). For some time now
international organizations (the World Bank, International Monetary Fund)1i have directly and
indirectly encouraged countries to improve the efficiency and competitiveness of their financial
sectors in order to promote savings, capital formation, and economic growth.
Support for these efforts has also come from cross-country studies which suggest that
countries with efficient and competitive financial markets also experience higher rates of
economic growth. Of necessity, this relationship has typically been assumed to be independent
of differences in legal structures and cultural environments across countries (as these
differences are difficult to specify accurately). However, a country’s legal structure (property
rights, contract enforcement), economic history (past inflation, bank failures), and cultural
environment (corruption, rule of law) can have a powerful influence on the effectiveness of the
financial sector in facilitating economic growth. Indeed, these influences may play a more
important role than competition in promoting growth.
Since legal and cultural environments are much more homogeneous among regions
within a single country, an interregional analysis may reflect better the underlying relationship
between competition and economic growth than one using a cross-country framework. As well,
one of the arguments for financial market deregulation in a country has been to expand access
to capital for smaller businesses. These firms are often innovators in addition to their role in
contributing to regional employment and output expansion (BERGER, et al., 1997). Finally,
results of a regional analysis of competition and economic growth can be viewed as an indirect
test of the apparent importance of financial sector competition found in cross-country studies.
In what follows, we briefly summarize in Section 2 the cross-country analyses of
competition and economic growth as well as previous studies of financial sector competition in
Europe. In Section 3, direct and indirect indicators of regional and national financial sector
competition are presented. These measures focus on market competition among savings and
-4commercial banks in five regions in Spain. On average, these institutions account for 93% of
banking industry assets over 1986-1998. An indirect indicator of market competition -a
Herfindahl-Hirschman Index of market concentration- is similar to the simple market share
measures used in cross-country studies and suggests that competition increased following
deregulation in Spain. However, this indirect indicator is not very predictive. Regional changes
in market concentration were not significantly related to regional changes in loan and deposit
prices nor to regional mark-ups of asset price over average cost (except in one case). These
two price measures (using individual bank data) directly indicate realized competitive behavior
and, in both cases, show that competition increased after deregulation. A Lerner Index (based
on estimating marginal cost) supported this conclusion as did a Panzar-Rosse H-statistic (based
on estimating revenue elasticities to changes in factor costs).
In Section 4, Granger-causality tests of the relationship between improved financial
sector competition and regional economic performance over 1986-1998 are presented. These
results indicate that, although financial sector competition seemingly improved in Spain after
deregulation, this improvement has apparently not played an important role in the concurrent
expansion of regional GDP over the same period. Although savers earned higher returns and
borrowers paid lower rates, these expected and desired benefits from deregulation apparently
were not very stimulative of regional economic growth. As noted in the conclusion in Section 5,
perhaps much larger changes in returns to savers and costs to borrowers would play a more
significant role in promoting economic growth. Alternatively, it is possible that by not being able
to accurately ‘hold constant’ differences in legal and cultural environments in cross-country
studies of competition and growth these studies have overstated the strength of the relationship
they measure. In this respect our regional results offer support to a recent re-analysis of the
earlier cross-country studies (LEVINE, et al., 2000).
2. Studies of Financial Sector Competition and Economic Growth.
Prompted in part by the break-up of the Soviet Union, there has been an increased
interest in how the size, efficiency, and competitive structure of a country’s financial sector (as
well as its legal underpinnings) may affect the real sector and associated economic growth.
Numerous cross-country studies have found strong evidence of a relationship (and apparent
causality) between the size and operation of financial markets and/or the development and
structure of the banking sector and economic growth (KING and LEVINE,1993; LEVINE and
ZERVOS,1998; RAJAN and ZINGALES, 1999; and CETORELLI and GAMBERA, 2001). An
important concern has been how differences in banking market competition may hinder or
promote economic growth (PETERSEN and RAJAN, 1995; JAYARATNE and STRAHAN, 1996;
-5CETORELLI and GAMBERA, 2001). In sum, more competitive banking markets provide easier
access to credit at lower costs that, in turn, can lead to more borrowing by a broader range of
firms which promotes economic growth.
A complicating factor is that legal and cultural environments also differ between
countries (LEVINE et al., 2000). One way to hold these influences constant, and thus more
accurately identify the relationship between financial sector competition and economic growth, is
to determine how changes in competition are related to economic growth in a regional
framework within a single country. In the U.S., there have been many studies of how
interregional differences in banking competition may affect bank prices and profitability, finding
that more competition can lower prices but has a mixed and usually insignificant effect on profits
(HANNAN, 1991; BERGER, 1995). In Europe, the focus has been on determining differences in
banking competition among countries or how, at the national level within a country, competition
has changed over time (VESALA, 1995; BERG and KIM, 1996; DE BANDT and DAVIS, 2000).
These studies find more support for competition to affect prices and profits, likely because
European markets have more and greater barriers to competition than does the U.S. While a
few European studies have considered the regional nature of financial market competition (PITA
BARROS, 1999, for Portugal and FUENTELSAZ, 1996, and MAUDOS, 1998, for Spain), these
do not focus on the relationship between regional market competition and regional economic
growth (which is the explicit purpose of this paper).
3. Measures of Regional Financial Market Competition.
3.1 Market Concentration as an Indicator of Market Competition. The standard method
used to infer financial market competition comes from the structure, conduct, performance
(SCP) paradigm which presumes (based on earlier cross-industry studies) that less
concentrated markets are likely to be more competitive. The cross-country studies of
competition and growth referred to above infer competitive behavior from the sum of the deposit
(or loan or asset) market shares of the 3 largest banks, or the 5 largest banks, or use a
Herfindahl-Hirschman Index (HHI).2iiThese three measures are typically highly correlated and
thus yield very similar results. The benefit of the HHI measure is that it falls when market shares
are more equal, suggesting a more competitive market when participants are of a similar size.
Unlike the U.S., information on the value of deposits, loans, or assets by local banking office in
various regions are not publicly available in most European countries including Spain. Thus past
studies of market concentration in Europe have instead used the regional distribution of branch
offices (which is known) to compute a Herfindahl-Hirschman Index of market concentration. A
-6bank having 40% of branches in a market is presumed to also hold a 40% deposit market share.
This assumes that the average value of deposits (or loans) per branch office of a bank: (1) is the
same for all branch offices of the same bank; (2) is the same for all branches at all banks; and
(3) is the same over time. Assumption (1) says that the value of deposits (or loans) at each
branch office of a given bank can be approximated by the ratio of the bank’s total deposits (or
loans) to its total number of branch offices. Although data limitations preclude us from doing
anything about this assumption, we can do something about the other two. Specifically, we
compute the average value of deposits (or loans) per branch office separately for each bank
and separately for each year. This permits the average value of deposits (loans) per office to
vary across banks and over time, removing assumptions (2) and (3), and is less restrictive than
only computing branch-determined HHIs (as done previously by FUENTELSAZ, 1996, and
MAUDOS, 1998).3
The time pattern of savings and commercial bank market concentration in Spain over
1986-1998 differed little between regional deposit or loan HHIs. As depositors typically have
less market power than borrowers, we report only the HHIs computed using the average value
of deposits per bank office -a deposit HHI (DHHI).4 The time pattern of the deposit HHI (DHHI)
for each of the five regions is shown in Figure 1. As seen, all but one region experienced a
reduction in concentration over 1986-1998. Concentration fell by 8% to 21% in four regions
while in one region (North) it rose by 11%. Over all regions, the deposit HHI fell from around
2,540 in 1986 to around 2,470 in 1998. The reduction in concentration suggests that banking
market competition may have increased over this time period.
3.2 A Measure of Realized Competition: The Loan-Deposit Rate Spread. According to the
structure, conduct, performance (SCP) paradigm, reductions in market concentration should be
associated with reductions in loan rates and/or increases in deposit rates. Indeed, average loan
rates fell and deposit rates rose in Spain after deregulation (which occurred in 1989). As a
result, the loan-deposit rate spread fell by 37% between 1986 and 1998 strongly suggesting an
increase in financial market competition.5 This reduction is shown for five regions in Figure 2.
Across all regions, the rate spread fell from 639 basis points (BP) in 1986 down to 400 BP in
1998. The spread fell in each region with reductions ranging from 27% (Nationwide) to 44%
(North). Interestingly, the region with the greatest reduction in the rate spread (North) was also
the only region that experienced a rise in its measure of market concentration (11%).
If there was a strong relationship between the change in market concentration (DHHI)
and the observed loan-deposit rate spread (SPREAD), then either indicator of market
competition could be used to assess the relationship between financial market competition and
-7regional economic growth. However, regressing the observed loan-deposit rate spread for each
bank (SPREAD) on the computed deposit Herfindahl-Hirschman Index (DHHI), along with other
explanatory variables, indicated that market concentration was not significantly associated with
the rate spread either for all regions pooled together or for any of the five regions separately.
These results are shown in Table 1. The unbalanced panel (unbalanced due to mergers)
covered 106 to 78 savings and commercial banks at annual intervals over 1986-1998 (n =
1,150). Four other variables -reflecting service efficiency, asset risk, loan demand, and regional
inflation- which can affect the loan-deposit rate spread (SPREAD) in addition to market
competition (DHHI), were specified in Table 1.6 A fixed effect model was used to allow for bankspecific effects not otherwise specified. Similar results were found when the same set of
independent variables in the same model were regressed on a different bank-specific
dependent variable the mark-up of asset price over average cost (PTA - ACTA).7 In this case
(not shown), only in one region (East & Northeast) was market concentration related to the
mark-up over average cost.
The weakness in the relationship between market structure (DHHI) and market conduct
(SPREAD) shown in Table 1 suggests two conclusions. First, our test of the effect of financial
market competition on regional economic growth should focus on the realized loan-deposit rate
spread as the preferred indicator of competition. Second, our regression results imply that
market concentration measures (such as HHI) used in cross-country studies may not strongly
reflect the expected market conduct/pricing response posited by the SCP paradigm. If lower
financial market concentration is insignificantly associated with more favourable loan and
deposit pricing, it is hard to see how lower concentration could be (other than spuriously)
associated with greater economic growth.
3.3 Two General Indicators of Competition. The deposit HHI measure of market concentration
and the loan-deposit rate spread are both bank-specific. That is, each of these measures can be
computed/observed for each bank in each region which, in turn, can be related to a regional
measure of economic growth. Two additional indicators of market competition -the mark-up of
price over marginal cost (the numerator of the Lerner Index) and the H-statistic- have to be
econometrically estimated and thus are not bank-specific. While they can usefully indicate how
competition may have changed over a period of years for a group of banks, the results should
not be used to see if competition Granger-causes economic growth as observed, bank-specific
data contain less error.
-8The mark-up of price (P) over marginal cost (MC) is similar to the loan-deposit rate
spread but is more comprehensive: it includes all assets (loans plus securities) and all
costs (deposit funding and operating expenses). Standard procedure (Bresnahan, 1989) is
to jointly estimate both a cost function (to determine marginal cost) and a demand function
(to determine marginal revenue and price), assume that profit maximizing banks set
marginal revenue to marginal cost, and solve for the associated price, marginal cost, and
quantity from which an average mark-up can be obtained for a group of regional
institutions. This has been done for five regions in Italy (ANGELLINI and CETORELLI,
1999) with the result that over time the estimated mark up closely follows the spread
between average asset price (PTA) and the average cost of deposits (interest paid on
deposits/total asset value).8
As data needed to estimate the demand for banking services in Spain is wanting,
we instead used the observed average asset price of banks in each region (PTA) and the
estimated marginal cost of assets (MCTA) for all banks in each region. MCTA was estimated
from a standard, single output, translog cost function.9 Four of the five regions in Spain
experienced a reduction in their mark-up (PTA - MCTA) between 1986-1989 (the period
before the wave of banking mergers) and 1994-1998 (the period after the wave of
mergers). The average reduction over all five regions was 18% while the regional changes
ranged from +8% to -36%. In contrast, averaged over the same pre- and post-merger subperiods, the loan-deposit rate spread fell in all five regions with an overall reduction of 33%
(the range was -23% to -34%).10
An alternative general indicator of the degree of market competition which requires
estimation is the PANZAR and ROSSE (1987) H-statistic. The H-statistic measures the
extent to which changes in banking costs are reflected in changes in banking revenues.
The equation estimated relates total revenue (TR) to three components of unit cost, a
measure of output capacity (total assets), and indicators of business mix.11 The derivative
TR/unit cost is the H-statistic. H can be negative or zero, as when revenues rise but
costs fall or are constant (suggesting monopoly power). When revenue changes are less
than cost changes, H is positive but < 1.0 (monopolistic competition) while revenue
changes equal to cost changes give H = 1.0 (perfect competition). The closer H is to 1.0,
the larger is the effect of a change in unit cost on revenues and hence output price,
suggesting greater market competition as price is more responsive to costs.12 Over the
entire period for all regions, H = .89 (standard error .010) suggesting weak monopolistic
competition in Spain’s financial sector as H is significantly different from both 0.0 and 1.0.
-9This result also held for all but one region (where H was not different from 1.0, suggesting
perfect competition).
To summarize, all of the indicators of banking market competition -the deposit HHI,
the loan-deposit rate spread, the mark-up of price over marginal cost, and the H-statisticsupport in varying degrees a conclusion that all or most regional banking markets became
more competitive in Spain after deregulation. We now relate changes in financial market
competition to regional economic growth. The Granger-causality tests we use require
annual measures of market competition. This means that the mark-up of price over
marginal cost and the H-statistic results can not be used as there are too few observations
to estimate these values annually. This is not a problem for the deposit HHI measure, the
loan-deposit rate spread, or even the mark-up of price over average cost (PTA - ACTA)
since these are observed, bank-specific measures. The regional time pattern of this last
variable is shown in Figure 3. Across all regions, the mark-up over average cost was 174
BP in 1986 but fell to 169 BP in 1998, a reduction of 3%.13
The relationship between our three bank-specific measures of market competition
(using data for all regions together) indicate that the deposit HHI is insignificantly related to
either the loan-deposit rate spread or the mark-up of price over average cost. In contrast,
the rate spread and the mark-up are significantly related (although the R2 is low). Thus,
although all three bank-specific measures indicate that competition has improved, they are
not strongly related to each other.
4. Does Greater Financial Market Competition Promote Regional Economic Growth?
Proponents of financial market deregulation argue that it can improve competition,
raise deposit rates (expanding the supply of loanable funds) and lower loan rates
(promoting investment in productive capital). While these price changes from increased
competition are well-accepted and observed in Spain, a question remains as to whether
the price changes are strong enough to have a significant stimulative effect on regional
economic growth. Or, as some have suggested (GREENWOOD and JOVANOVIC, 1990),
could it be the other way around?
Does more rapid economic growth stimulate the
development of financial markets, inducing new entry, innovation, and efficiency, and
make markets more competitive?
causality tests.
This issue is addressed with a series of Granger-
-10To conclude that expanded market competition can promote or ‘cause’ regional
economic growth, two conditions have to be met (PINDYCK and RUBINFELD, 1991).
First, in a time-series regression of current regional economic growth (RGDPt) on lagged
values of economic growth (RGDPt-1, RGDPt-2, etc.) the addition of lagged values of
market competition (say SPREADt-1, SPREADt-2, etc.) should significantly improve the
explanatory power of the regression.14 An F-test using the following two regressions is
used to determine if the added independent variables (as the sum Σγi) are significant:
RGDPt = αo + Σβi RGDPt-i
RGDPt = αo + Σβi RGDPt-i + Σγi SPREADt-i .
Second, in a time-series regression of an indicator of current market competition on
lagged values of market competition, the addition of lagged values of economic growth
should not significantly improve the explanatory power of the regression. In the two
equations below, an F-test of the sum Σβi should not be significant.
SPREADt = αo + Σγi SPREADt-i
SPREADt = αo + Σγi SPREADt-i + Σβi RGDPt-i .
If, instead, the situation is reversed -so that the Σγi in the first set of equations is not
significant while in the second set Σβi is significant- then regional growth Granger-causes
competition.15 Finally, if the added independent variables in both sets of regressions are
significant, then it is likely that some unspecified third influence is causing both competition
and growth.
There is no guide as to the number of lags to use in the analysis so we report
results with one, two, and three-period lags (i = 1, 2, or 3). Three measures of market
competition are used: deposit HHI market concentration (DHHI), the loan-deposit rate
spread (SPREAD), the mark-up of asset price over average cost (PTA - ACTA). Importantly,
the time-series data used in the above regressions should be stationary for the F-tests to
be valid. Augmented Dickey-Fuller tests were used to check for the existence of unit roots.
First differencing all the variables was sufficient to meet the stationarity requirement.
The results of the Granger-causality tests using first differenced data (for either
direction of causation) over 1986-1998 are shown in Table 2. Although, in previous crosscountry studies, market concentration has been found to affect economic growth
(CETORELLI and GAMBERA, 2001), this result is not evident using regional data for
Spain. This is not surprising given the very weak relationship between market
concentration (DHHI) and loan and deposit prices (SPREAD) reported above. That is, it is
difficult to see how changes in concentration that are essentially unrelated to price
-11changes can stimulate regional growth. But even using observed changes in banking
prices (SPREAD), which indicate realized competition, yields the same result: reductions
in the loan-deposit rate spread do not Granger-cause regional economic growth. Finally,
the mark-up of asset price over average cost (PTA - ACTA) also does not Granger-cause
regional growth. Thus, at least for Spain, financial market deregulation which promotes
market competition does not appear to have had a strong stimulative effect on regional
growth.16
As deregulation in Spain had a greater impact on savings bank merger behaviour
and expansion than it did for commercial banks, additional causality tests were undertaken
separately with these institutions. Two periods were examined: 1986-1993 which covers
the period prior to and during the wave of mergers which followed deregulation in 1989
and 1994-1998 which covers the post-merger adjustment period. These additional tests
(not shown) reinforced the conclusion that market competition does not Granger-cause
regional growth. They also indicated that the causality seen moving from economic growth
to market competition with the SPREAD variable was limited to the time period during
which market shares were strongly contested during the wave of mergers induced by
deregulation. After the merger wave, savings banks slowed their rapid expansion and
adjusted to the new market structure. Thus the causality identified where growth causes
competition for one measure of competition over the entire period was apparently
temporary and restricted to the earlier 1986-1993 period concurrent with the merger wave.
5. Conclusions.
This paper has three purposes. First, since antitrust authorities believe that a
competitive financial sector confers benefits on users of financial services, we wanted to
document and analyze the effect that financial market deregulation may have had on
different national and regional measures of market competition and banking sector prices
in Spain. Second, given the emphasis of international agencies on promoting national
financial sector development and competition to permit more rapid national economic
growth, we wanted to determine if the greater financial market competition experienced by
Spain over 1986-1998 was strong enough to have had a significant effect on regional
economic expansion. A third purpose, related to the second, was to see if a regional
analysis of the relationship between market competition and regional growth would (or
would not) support recent cross-country analyses suggesting that a competitive financial
-12sector can promote economic expansion. A regional test of this proposition is preferred
over a cross-country analysis. Other factors known to markedly differ across countries such as legal structure (property rights, contract enforcement) and cultural environment
(corruption, rule of law)- are much more homogeneous in a regional framework so these
(typically unspecified) influences on growth are effectively ‘held constant’ in a regional
analysis.
Our analysis showed that banking sector deregulation in Spain in 1989 was
associated with greater financial market competition. Although differing in magnitude,
measures of banking market concentration (a Herfindahl-Hirschman Index), a loan-deposit
rate spread, the mark-up of price over marginal (or average) cost, or a Panzar-Rosse Hstatistic all showed some improvement in market competition. However, although the
structure, conduct, performance (SCP) paradigm posits that decreases in market
concentration should lead to increased competition and thus more favourable prices for
users of financial services, this relationship was essentially zero for Spain. Although prices
were indeed more favourable, their changes were not significantly related to changes in
market concentration. This suggests that the commonly used Herfindahl-Hirschman Index
is not a very reliable metric for assessing market pricing conduct and antitrust authorities
would benefit by augmenting their analyses with direct measures of realized competition
(such as actual prices) rather than rely on inferences from the SCP paradigm.
Granger-causality tests were performed to see if the greater financial market
competition experienced by Spain over 1986-1998 was strong enough to have had a
significant effect on regional economic expansion. All the tests indicated that increased
competition was not a significant influence on regional growth. Although deregulation was
associated with increased market competition (both inferred and realized) and market
prices became more favourable to users of financial services, these improvements have
apparently not played an important role in the concurrent expansion of regional GDP.
Our regional tests of the relationship between financial sector competition and
economic growth are at odds with recent cross-country analysis which find a significant
relationship. As a regional analysis can ‘hold constant’ differences in legal and cultural
environments that are difficult to accurately specify across countries, our results offer
support to a recent re-analysis of earlier cross-country studies which suggests that such
legal and cultural differences play an important role in explaining economic growth
(LEVINE et al., 2000).
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ENDNOTES
1. See, for example, LINDGREN, et al. (2000) and CLAESSENS and GLAESSNER (1997).
2.The HHI measure is the sum of the squares of each bank’s market share for all banks in a market
or HHIm = Σ(ms i)2 where ms is the market share of the ith bank in the mth market. A market share of
40% is expressed as 402, not .402. A merger that gives a HHI > 1,800 is considered uncompetitive
in the U.S..
3. Specifically, DHHIm,t = Σ(msi,t)2 where msi,t = [(depositsi /officesi )t * officesi,m]/ Σ[(depositsj
/officesj )t * officesj,m] i,j,t for the mth market containing the i,j banks during year t (ms can differ
across banks and over time).
4. In terms of market area, five regions are identified: (1) Nationwide with 24 very large institutions
who operate in all regions (reduced through mergers to 23 by 1998); (2) South with 16 banks
(reduced to 7 through mergers); (3) Center & Northwest with 24 (reduced to 16); (4) East &
Northeast with 29 (reduced to 22); and (5) North with 13 (reduced to 10). The smallest institutions
remain in one region but medium-sized and large banks compete in their own region and in regions
nearby. In 1986, there were 106 institutions (77 savings banks and 29 commercial banks). By 1998,
there were 78 (50 savings and 28 commercial). A list of these institutions and their allocation to the
five regions is available on request.
5. The average loan rate (rL) is the ratio of loan revenues to the value of loans while the average
deposit rate (rD) is the ratio of deposit interest expenses to the value of deposits. Thus the loandeposit rate spread (SPREAD) is rL - rD for each bank over time. Any change in market interest
rates will, of course, influence both the level of r L and rD so the spread itself will reflect competitive
conditions that determine their difference.
-15-
6. These variables are defined in Table 1. Even when these four variables were excluded, so
SPREAD was regressed on only DHHI, the relationship was still insignificant.
7. PTA equals revenues from loans, securities, and other earning assets, plus fee income all divided
by the value of loans, securities, and other earning assets, essentially a unit revenue (or price)
measure. ACTA is the ratio of total operating and interest cost to total assets.
8. The average cost of deposits used in this referenced study is less than the average cost of
assets (ACTC), which is the variable used in the previous section.
9. Total cost was specified to be a translog function of three input prices (labor, funding, physical
capital) and an output indicator (total assets). Previous analyses have shown that the translog and
Fourier functional forms yield very similar cost predictions when evaluated using mean values of the
independent variables (which is how the translog results are used here).
10. The results of the translog estimation and separate information on price and marginal cost are
available from the authors by request.
11. We followed the H-statistic model specification shown in DE BANDT and DAVIS (2000).
12. As total cost is less than total revenue, the different bases need not yield H = 1.0 in percentage
terms, which is the DE BANDT and DAVIS (2000) specification as logs of the variables were used.
When the elasticity of demand for banking output is constant, there is (in theory, and when
variables are measured properly) a one-to-one relationship between the H-statistic and the Lerner
Index (TIROLE, 1987).
13. In four regions, this mark-up fell by 2% to 28% from 1986 to 1998 but rose by 15% in one region
(South).
14. The regional GDP economic growth measure (RGDP) is computed for each bank as a branch
weighted average of the GDP for the regions where the bank operates.
15. A referee has noted that this can occur when banks expand and compete for market share in
faster growing and more prosperous regions. Banks know that customers -once they establish a
relationship with an institution- are more likely to continue with the same institution over time than
switch to a competitor making it important to attract new customers in expanding markets.
16. The only support for economic growth causing changes in market competition occurs with the
SPREAD variable. As seen in Table 2, this occurs when the data are lagged for 2 and 3 periods.
-16-
Table 1. The effect of concentration on the loan-deposit rate spread
Panel data---fixed effects model
Dependent variable = SPREAD
t values in parenthesis
All regions
Nationwide
DHHI
0.093366
0.094881
(0.78)
(0.40)
DEPBR
-0.0000036***
-0.0000025*
(-2.95)
(-1.61)
LOSSRAT
-0.019594
0.895891**
(-0.92)
(1.99)
RGDP
-0.032964
-0.092562
(-0.67)
(-0.96)
RCOL
-0.058436***
-0.06443
(-8.64)
(-0.42)
Adjusted R2
0.78
0.67
n. observations
1150
304
*** Significantly different from zero at 1 per cent level
** Significantly different from zero at 5 per cent level
* Significantly different from zero at 10 per cent level
Center and
Northwest
2.51101**
(1.69)
0.0000038
(0.24)
0.308107
(0.88)
-0.007369
(-0.05)
-0.107876***
(-3.43)
0.73
244
South
-2.09131**
(-1.73)
-0.0000089
(-0.37)
0.190782
(0.76)
0.025409
(1.07)
-0.03619*
(-1.35)
0.38
140
East and
Northeast
0.012982
(0.23)
-0.0000024**
(-1.89)
-0.019583
(-1.11)
0.061372
(1.13)
-0.079739***
(-7.42)
0.86
320
North
0.098135
(0.75)
-0.0000027**
(-2.05)
-0.049397
(-0.12)
-0.07277
(-0.53)
-0.047032**
(-2.56)
0.80
142
SPREAD = loan-deposit rate spread (average loan rate – average rate on deposits and other funding)
DHHI = deposit Herfindhal-Hirschman Index (market concentration measure)
DEPBR = deposit/branch office ratio (a service efficiency measure)
LOSSRAT = loan losses/total asset ratio (asset risk measure)
RGDP = regional GDP (loan demand indicator)
RCOL = regional cost-of-living index (inflation measure)
Table 2. Regional bank competition and regional economic growth: Granger-causality
test results
No
No
No
DHHI Granger-causes RGDP
Number of lags
1
2
3
F-statistic
0.17
0.07
0.87
No
No
No
SPREAD Granger-causes RGDP
Number of lags
F-statistic
1
0.03
2
0.28
3
0.07
No
No
No
PTA-ACTA Granger-causes RGDP
Number of lags
F-statistic
1
0.12
2
0.13
3
1.01
No
No
No
RGDP Granger-causes DHHI
Number of lags
1
2
3
F-statistic
0.42
0.01
0.01
No
Yes
Yes
RGDP Granger-causes SPREAD
Number of lags
F-statistic
1
2.23
2
7.85
3
5.75
No
No
No
RGDP Granger-causes PTA-ACTA
Number of lags
F-statistic
1
0.19
2
0.28
3
0.61
______________________________________________________________________________
Augmented Dickey-Fuller (ADF) unit root tests for first-differenced data
Variable
Test statistic
RGDP
DHHI
SPREAD
-31.05
-27.47
-16.81
Critical values for rejection of hypothesis of a unit root:
PTA-ACTA
-18.50
1% critical value -3.4965
5% critical value -2.8903
10% critical value -2.5819
-17-
Figure 1: Bank Market Concentration (DHHI) by region in Spain
6000
Deposit HHI value (DHHI)
5000
4000
3000
2000
1000
0
1986
1987
1988
Nationwide
1989
1990
South
1991
1992
Year
1993
Center & Northwest
1994
1995
1996
1997
East & Northeast
1998
North
Figure 2: Loan-Deposit Rate Spread (SPREAD) by region in Spain
(1986-1998)
1000
900
Loan-Deposit Rate Spread (SPREAD)
800
700
600
500
400
300
200
100
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
Nationwide
South
Center & Northwest
East & Northeast
North
-18-
Figure 3: Mark-Up of Price over Average Cost (Mark-Up) by region in Spain
(1986-1998)
Mark-Up of Price Over Average Cost (Mark-Up)
300
250
200
150
100
50
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
Nationwide
South
Center & Northwest
East & Northeast
North