Search

This paper examines market concentration and its effect on competition in the Chinese commercial banking market. This study also investigates how changes in competition have affected the financial stability of Chinese commercial banks. To test the competitive conditions, we obtained the H statistic of the Panzar-Rosse model from a revenue function equation. The degree of financial stability is estimated by the Z-score formula. The Chinese banking industry has become an increasingly less concentrated market with an increased number of banks. Along with a decreased market concentration, competition in the Chinese banking industry has improved moderately. However, its market structure is still far from a competitive market. An individual bank’s ability to earn higher markup or charge a higher net interest margin contributes to its financial soundness, although a higher degree of market concentration may have negative effect on the financial stability of the entire banking system.

Market concentration in the Korean banking industry has markedly increased since the financial crisis of 1997-1998 because of M&As, P&As, and consolidation of banks. With this change, there has been a growing concern over market power in the Korean banking sector. We examine the effects of market concentration on bank efficiency and competition for the period of 1992-2006. Three different indicators of bank inefficiency are used in this study, including X-inefficiency that is derived from the directional technology distance function. The level of competition is measured by both the H-statistic of the Panzar-Rosse model and the level of the net interest margin and its standard deviation. Empirical results indicate that market concentration has not improved bank efficiency through scale economies or scope economies. Instead, recent mergers, acquisitions and consolidation of banks resulted in an increase in inefficiency measured by the three different indicators: Xinefficiency, labor inefficiency and asset inefficiency. While an increase in market share of individual banks improved bank efficiency, an increase in the overall market concentration ratio resulted in lower efficiency. Our study also finds that the Korean banking sector has been monopolistically competitive throughout the sample period except for the crisis period according to the H-statistic. Although an increase in market concentration ratio has not changed the overall level of bank competition, it has a positive significant effect on the level of the average interest margin.