The dynamics and implications of market power, bank efficiency and bank risk-taking behaviour in the East African community

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Stellenbosch : Stellenbosch University
ENGLISH SUMMARY: The thesis sought to investigate the implications of increased market power and its effect on bank efficiency, bank risk-taking behaviour and overall financial stability. In Africa, banks are characterized by relatively wide interest rate spreads which is an indication of lack of competition. Empirical evidence suggests that lack of competition leads to high bank concentration and increased market power which can hinder the level of bank efficiency and financial stability in an economy, especially if some banks are too big to fail. These are issues of concern because banks play a critical role in the allocation and distribution of resources in an economy to spur economic growth and development. Against this background, this thesis presents an assemblage of empirical papers on bank concentration, competition, efficiency and bank risk-taking behaviour within the East African Community (EAC). Several panel data estimation techniques were employed using a sample of 149 banks with 1,805 observations over the period 2001–2018 to explore the existing linkages among the variables. Bank concentration and competition are captured using structural and non-structural measures and, unlike other previous studies which measure bank efficiency in a more generic manner, it is decomposed into technical, pure technical, scale, cost and revenue efficiency. Furthermore, this study explores the comprehensive types of risk-taking behaviour which include credit risk, liquidity risk, capital risk and insolvency risk. The findings from the empirical analysis are organized into four essays. The first essay examines whether increased bank concentration and lack of competition leads to inefficiency. The findings reveal that the effect of bank concentration and competition depends on the type of efficiency. In particular, bank concentration has a positive effect on technical, pure technical and profit efficiency, but a negative effect on cost and scale efficiency. In addition, greater competition is observed to foster technical, scale, cost and profit inefficiency. These results are robust to alternative market power measures and an array of control variables. The findings reveals important policy implications to the regulators that a trade-off between concentration and competition through anticompetitive policies should be ensured so as to create a balance between technical, scale, cost and profit efficiencies. The second essay explores the trade-off between bank concentration, competition and financial stability. The methodological approach applied provides a critical and original contribution to the existing literature by testing various theories that explain the relationships between bank concentration, competition and stability. The findings reveal that bank concentration and low competition lead to more financial stability and less probability of bank default risk. A non-linear relationship between competition and stability could not be observed, revealing that greater competition undermines bank stability and makes banks more vulnerable to default risk. The findings thus lend support to the concentration–stability hypothesis that greater market power leads to more stability even after controlling for bank, industry and macroeconomic variables. The third essay investigates the joint effect of market power and different types of bank efficiency on financial stability. The empirical findings reveal that the joint effect of market power and bank efficiency is critical for financial stability and the effect depends on the specific type of efficiency being explored. Increased market power is observed to have a direct positive effect on bank stability, thus lending support to the concentration–stability hypothesis. With respect to bank efficiency, cost and revenue efficiency have a positive significant effect with bank stability while the effect of technical, pure technical and scale efficiency is insignificant. Overall, concentrated banks with higher cost and revenue efficiency are more stable than the inefficient banks thus supporting the efficiency–stability hypothesis. The findings highlight that an eclectic policy to ensure a trade-off between bank concentration and competition should be ensured by the bank regulators. The last essay examines the impact of bank risk-taking behaviour and market power on efficiency. It looks at comprehensive types of risk-taking behaviour, including credit risk, liquidity risk, capital risk and insolvency risk, while structural and non-structural measures of market power are employed. Bank efficiency is decomposed into technical, pure technical, scale, cost and revenue efficiency, and the findings reveal that the effect of bank risk-taking behaviour varies depending on the type of efficiency and the existing market structure. Market power is observed to precede all types of bank efficiency, thus supporting the concentration–efficiency hypothesis that banks with greater market power are more efficient. Overall, reduced bank risk-taking behaviour and greater market power leads to more bank efficiency. The results present potentially important policy recommendations for bank risks, market power and efficiency
AFRIKAANSE OPSOMMING: Geen opsomming beskikbaar.
Thesis (PhD)--Stellenbosch University, 2022.
Banks and banking -- South Africa, Competition -- South Africa, Financial services industry -- Deregulation -- South Africa, Monetary policy -- South Africa, UCTD