Deregulation, contestability and market structure for banks in Taiwan

Abstract

This is the first study to integrate structural and non-structural approaches into the evaluation of competitive conditions for banks in Taiwan. It is found that the results of structural and non-structural approaches are compatible. This study finds that market share may not have a significant impact on banks’ efficiency but may significantly impact profitability. This implies that banks are willing to sacrifice something to expand their market share, such as not enforcing minimum cost targets and wasting resources to raise an already unrealistic market share target. Furthermore, it is essential to pay attention to the observation that the degrees of competition deteriorated after the Global Financial Crisis (GFC). This argues that the transmission mechanism from market structure to performance occurring through product differentiation is able to exercise market power in banks products and earn supernormal profit, which is normally associated with dominant banks and not with collusive behaviour.

Keywords:

• Contestability
• structure-conduct-performance hypothesis
• efficient structure hypothesis
• banks efficiency
• quiet life hypothesis
• global financial crisis

JEL CLASSIFICATION:

• G21
• L16

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Following Claessens and Leaven (2004), the adjusted rate for small negative values in any sample is measured by ln(1 + ROA) in Equation 8.

2 To conserve space, I not show OLS results because main key results are almost similar with GMM estimated results.

3 Berger (1995) states that, if only RMP holds, CONC has a zero coefficient because CONC is only spuriously related to profit through its correlation with MS and that the coefficient of all the other key variables are either relatively small or zero.

4 Shaffer (2004) argued that the restriction that E = 0 is necessary for the perfect competition case, not for the monopolistic competition case.

5 For instance, Coccorese (1998) showed that the banking market is in monopolistic competition in Italy; Matthews, Murinde, and Zhao (2007) found that competition in British banking is most accurately characterised by the theoretical model of monopolistic competition. On the other hand, few studies have shown the banking market status to be in perfect competition; Al-Muharrami, Matthews, and Khabari (2006) showed that the test result for H = 0 and H = 1 are both rejected by the banking industry in UAE (H = 1.04) and, thus, they view the competitive condition to be in perfect competition.

6 The number of banks is reduce form 51 to 37 after twice financial reform in Taiwan, previous literatures as evidence of the banks merger would to increase asset size, market share and market power such as Lang and Welzel (1996).

Additional information

Notes on contributors

Chang-Sheng Liao

Chang-Sheng Liao (Ethan) is Associate Professor of School of Internet Economics and Business, Fujian University of Technology, Fujian, China. He received the PH.D degree in Finance from Graduate Institute of Finance at the National Taiwan University of Science and Technology . His work has appeared in scholarly journals, such as International Journal of Business and Emerging Markets, Journal of Asian Finance Economics and Business, Journal of Business, Economics and Finance, Asian Economics and Financial Review, International Journal of Economics and Research, Advances in Management and Applied Economics, and others.

Chang-Sheng has served as a referee for following journals, such as Management Decision, Emerging Markets Finance and Trade, Economics Modelling, Emerging Market Review, African Journal of Business Management, International Journal of Productivity and Performance Management, and others. His main research interests are in the area of Finance institution management, efficiency evaluation, productivity analysis and corporate governance.