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Part A. Bank as financial intermediary
Lecture 2. Concentration and
competition in the banking sector
The Romanian banking sector
Outline
(1) Banking market concentration
(2) Banking market competition
(3) Case study. The Romanian banking
system
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Concentration and competition in the banking sector
Recent trends in global banking:
mergers among foreign banks and cross-border mergers
globalization
financial conglomeration
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Concentration and competition in the banking sector
In the past decade the banking industry faced a
widespread consolidation (through mergers and
acquisitions, M&As) especially in emerging
economies.
Consequences
a decline in the number of smaller banks;
large multinational banks play an increasing role in
domestic banking markets.
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Concentration and competition in the banking sector
Incentives for M&As
Economies of scale are achieved by creating a combined institution of larger size
capable of achieving lower unit costs of producing financial services.
e.g., consolidation of the credit department and branch delivery system
Economies of scope can generate cost savings from delivering services jointly
through the same organization rather than through specialized providers.
e.g., both banking and insurance products supplied by the same institutions
Eliminating inefficiencies. Cost efficiency can be considerably improved by
takeovers in which relatively more efficient banks acquire relatively less efficient
banks and increase the efficiency of the target bank after the operation.
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Concentration and competition in the banking sector
Globalization
Global banks are the institutions with the widest reach, that is,
either through subsidiaries or branches they provide services in
several world countries and have a presence in all continents.
International banks provide cross-border services, but operate in
too few countries, or are relatively too small, to be defined as
global. Such banks are also referred to as regional banks.
Local banks are institutions providing services only in the country
where it is headquartered.
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Concentration and competition in the banking sector
Financial conglomeration
a group of enterprises, formed by different types of financial
institutions, operating in different sectors of the financial industry.
Benefits
the possibility of exploiting greater cost economies
the capacity of the group to isolate risk from its different activities
the ability to distribute a full range of banking, securities and insurance
services may increase their earning potential and lead to a more stable
profit stream.
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Concentration and competition in the banking sector
Measurement
Concentration index (top 5)
Competition index – HHI (all banks)
for:
Total assets
Gross loans
Customer deposits
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(1) Banking market concentration
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(1) Banking market concentration
Index Definition
Total Assets concentration
(top 5)
Share of total assets of the
five largest banks
Gross Loans
concentration (top 5)
Share of total gross loans
of the five largest banks
Customer Deposits
concentration (top 5)
Share of total customer
deposits of the five largest
banks
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(1) Banking market concentration
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A market with a Concentration index less than
30% is low concentrated marketplace
a Concentration index of 30%-60% indicates a
moderately concentrated market
a Concentration index of 60% or greater indicates
a highly concentrated market
(2) Banking market competition
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(2) Banking market competition
Index Definition
Herfindahl-
Hirschman
index
It is calculated by squaring
the market share of each bank
competing in a market, and
then summing the resulting
numbers, in terms of total
assets, gross loans and/or
customer deposits.
where si is the market share of the ith
bank: si=TABank i/TAsystem*100, or
si=LoansBank i /Loanssystem*100, or
si=DepositsBank i/Depositssystem*100
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(2) Banking market competition
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A market with a HHI less than 1,000 is a
competitive marketplace
a HHI of 1,000-1,800 indicates a moderately
competitive market
a HHI of 1,800 or greater indicates a low
competitive market
Application 1. The impact of merger between
Transilvania Bank and Volksbank on the
competition in Romanian banking system
Application 2. The impact of merger between two
banks (from top 10) on the competition in
US/China/UK/Spain banking systems
!!! Homework
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The Erste Bank Group across Europe
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Societe Generale across the world
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Banks of China across the world
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(3) Case study. The Romanian banking system
3.1. National Bank of Romania
3.2. Commercial banks
3.3. Support institutions
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3.1. National Bank of Romania
NBR’s attributions target the following areas:
monetary policy (inflation targeting);
exchange rates (reducing volatility in the foreign exhange
market, but not artificially maintaining "favorable" courses);
authorization, regulation and prudential supervision
of credit institutions;
supervision of payment and settlement systems in
national currency.
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3.1. National Bank of Romania
Banking prudential supervision
Financial instability can lead to the manifestation of the financial
crisis, with profound negative effects on the real economy
speculative bubbles
stock market crashes
increased credit risk and a prudential/caution attitude of on the
granting new loans
reduced household and corporate financing
contraction of investment and consumption
higher unemployment rates and lower gross domestic
product (GDP)
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3.1. National Bank of Romania
The prudential supervision model of NBR:
(1) countercyclical regulatory policy;
(2) prudential standards more stringent than those
recommended at the European level (solvency and capital
adequacy).
=> In Romania there were no bankruptcy cases in the banking
sector during crisis.
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3.2. Commercial banks
Structural indicators of the Romanian banking system
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3.2. Commercial banks
Credit institutions’ share capital as a percentage of total capital and their
market share by country of origin
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3.2. Commercial banks
Market share and number of credit institutions with foreign
capital (international comparison)
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3.2. Commercial banks
Number of bank branches and employees
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3.2. Commercial banks
Financial intermediation (international comparison)
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3.2. Commercial banks
Asset concentration (international comparison)
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3.3. Support institutions
Clearing house
Casa de compensare (Transfond)
Deposit Guarantee Fund
Fondul de Garantare a Depozitelor în Sistemul Bancar (FGDB)
Credit Risk Bureau
Centrala Riscurilor de Credit (CRC)
Credit Bureau
Biroul de Credit (BC)
Payment Incident Bureau
Centrala Incidentelor de Plăţi (CIP)
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