Does market power influence bank profits in Mexico? A study on market power and efficiency

Abstract

The Mexican banking sector has experienced a process of consolidation which has caused concerns of possible collusion effects. This article analyses the determinants of bank performance in the Mexican banking sector for the period 2001–2009. Two market power hypotheses, Structure-Conduct-Performance (SCP) and Relative-Market-Power (RMP) alongside two variants of the Efficient-Structure (ES) hypotheses are tested in order to find out whether bank performance has been driven by market structural effects or by greater efficiency. The results state that bank profits have been determined by greater market share, confirming the RMP hypothesis. At the same time, the findings show that profits persist over time and adjust slowly to their natural (average) level, suggesting that the banking sector is not very competitive. Moreover, there is no evidence of a positive relationship between greater efficiency and bank profits. Finally, while capitalization levels increase bank profits, liquidity risk decreases them.

Keywords:

• bank performance
• Data Envelopment Analysis (DEA)
• Generalized Method of Moments (GMM)
• Structure-Conduct-Performance (SCP)
• Efficient-Structure (ES) hypothesis
• profit persistence

JEL Classification:

• D20
• D40
• G21
• L11

Notes

¹ At the beginning of the period of study, 2001, the number of commercial banks operating in Mexico accounted to 35 banks. However, by the end of 2009, the number of commercial banks increased to 44 banks. Although more banks have entered the banking sector, the market still appears to be highly concentrated.

² Registered new commercial banks for the period 2006–2008 include: BANCOPPEL, THE BANK OF NEW YORK MELLON, CIBANCO, DEUNO, VOLKSWAGEN BANK, BANCO FACIL, UBS, BANCO AMIGO, BANCO REGIONAL, BANCO WALMART, ACTINVER, MULTIVA, BANCO DE AHORRO FAMSA, COMPARTAMOS, BARCLAYS BANK and AUTOFIN.

³ For comparison, the ROE averages for the period 2002–2009 for Argentina, Brazil, Colombia and Venezuela are 1.4%, 13.3%, 15.2% and 23% respectively (Source: Bankscope database).

⁴ If all commercial banks are included in the analysis, the period averages are, 0.52% for ROA and 9.5% for ROE, respectively.

⁵ The ‘quiet life’ hypothesis suggests that firms with greater market shares have no incentives to become more cost efficient, even at the expense of somewhat lower profits (Berger and Hannan, 1997).

⁶ The structural characteristics of a banking sector, a specialized knowledge or regulatory advantage enjoyed by some market participants, may result in bank entry being blocked or slowed down (Goddard et al., 2011).

⁷ Both ROA and ROE are used as bank performance proxies for robustness purposes.

⁸ The persistence of profitability signals barriers to competition as the lagged performance coefficient approaches unity (Mueller, 1977; Berger et al., 2000; Goddard et al., 2004a).