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Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry

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Abstract

Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favouring a reduction of loan rates and then an increase in investment. These expected gains are a major issue for transition countries in which bank credit represents the largest source of external finance for companies. With the use of quarterly data for Czech banks, this paper aims to estimate the effects of banking competition in the Czech Republic. First, we measure the level and evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, using data on loan prices. We find no improvement in banking competition during the transition period. Second, we investigate the relationship and causality between competition and efficiency. We perform a Granger-causality-type analysis that supports negative causality only running from competition to efficiency. Therefore, our results reject the intuitive ‘quiet life’ hypothesis and indicate a negative relationship between competition and efficiency in banking.

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Notes

  1. The precise number of bank failures for each year from 1994 to 2000 was: 1, 3, 2, 5, 3, 3, 2, respectively.

  2. ČSOB, Česká Spořitelna, Komerční Banka.

  3. This argument is summarised in the famous sentence from Hicks: ‘The best of all monopoly profits is a quiet life’.

  4. We do not consider that cost efficiency and managerial performance are equivalent, as cost efficiency can be affected by exogenous elements that are influenced by managerial performance such as environment. These elements could then be included by including environmental variables in the estimation of cost frontier, following for instance Dietsch and Lozano-Vivas (2000). However, such inclusion is useless in our investigation because our estimations on the sample of banks are from a small country, meaning that we can reasonably consider that environment is similar for all banks and consequently that cost efficiency measures managerial performance.

  5. We do not include mortgage banks since a mortgage bank has a different production function than a commercial bank, because of different activities.

  6. As several authors, for example, Weill (2003), include investment assets as an additional output, we estimated efficiency scores both including and excluding investment assets, but found only negligible differences.

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Acknowledgements

We thank Robert Lensink, David Kemme, Paul Wachtel, Koen Schoors, Rudi Vander Vennet and all seminar participants of the ‘Conference on Risk, Regulation and Competition: Banking in Transition Economies’ in Ghent (September 2006). The views expressed are those of the authors (Anca Pruteanu-Podpiera and Franziska Schobert) and do not necessarily reflect the views of the Deutsche Bundesbank and the Czech National Bank.

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Authors and Affiliations

  1. Czech National Bank, Prague, Czech Republic

    Anca Pruteanu-Podpiera

  2. Institut d'Etudes Politiques, Université Robert Schuman, 47 avenue de la Foret Noire, Strasbourg, 67000, France

    Laurent Weill

  3. Deutsche Bundesbank, Frankfurt, Germany

    Franziska Schobert

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  1. Anca Pruteanu-Podpiera
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  2. Laurent Weill
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  3. Franziska Schobert
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Pruteanu-Podpiera, A., Weill, L. & Schobert, F. Banking Competition and Efficiency: A Micro-Data Analysis on the Czech Banking Industry. Comp Econ Stud 50, 253–273 (2008). https://doi.org/10.1057/palgrave.ces.8100248

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