On the Implications of Market Power in Banking - Assignment Example

Referee Report “On the implications of market power in banking” This paper has investigated about how different types of market are power effect, bank efficiency and have the stability of the developing countries. It also describes of how the competition stability can make documentation and analyses the difficult relationship between variables that are being regulated for the market power, for the stability of the bank and profit oriented firm. The results show how the market got a higher degree of market, which lies in a great stability of the bank and can be bought to the profit efficiency and not for the cost efficiency losses. The findings of the justification about the traditional views by the increasing the competition may undergo the bank stability and which have to bear stress for the banking system in the developing countries (Rudolph, 2006, pp.60-62). General Assessment From the past two decades, policymakers are in the various part of the world who has taken some steps to make the financial markets; they are promoting much foreign competition the deregulating of interest rates. The financial markets have high pressure in banking which are encourages the financial institutions to enter the new markets where the competition with the financial market is very low. The efficiency of the gains can be materialised from entering the new markets which are mixed. It develops a model to explain foreign banks and the domestic banks which lends money to the business which has a large capital and to the small firm. But there are some local banks which lend money to the small enterprises. A recent debate says that the market has a high power that emerged the market power on the bank stability, recent research it have been analysed that the less competitive market are not that much stable (Silipo, 2009, pp.101-103). It also investigates the market power on its international banks and it is developing the country relatively with the capital markets. The banking structure is changing to raise the concerns with the competitive conditions, the efficiency in the delivery of financial services and the overall bank stability. It refers from the previous work for the sample of the cover age and the research methodology. There is no prior knowledge for the research that can be addressed the complex interaction between the competition, stable and efficiency of the developing countries (Hoose, 2000, pp. 200-202). Major Points The discussion is in the favour of a large competition, and which apply to all the industries and it derive from applying for the classic industrial organisation economics. When the market are prevailing the managers may have many objectives other than profit maximisation, and those do not have any incentives for working hard to keep the costs under control for reducing the cost efficiency the evidence are being found to prevails in the US banking. As compared with the body of literature the efficiency of research based on the relationship of the market research and the bank efficiency does not practically exist for the developing countries. Those studies in a bank level are measuring the competition for investigating the important of the market power for the efficiency of bank in the developing countries. The market power should also consider both the cost and the profit efficiency (Dietrich, 2009, pp. 45-47). The most important part is the cost maximisation of the banks, which achieve high profits by generating their revenues. There can be some problem which arises for taking casual relationship between bank efficiency. The most efficiency competitive pressure is being survived to gain the share of the market by increasing the capital equity of the banks. The market power in the bank is desired but the there is possibility of meeting the losses; the market power has to reduce the information for developing a strong relationship with individuals firms. The banks have appropriate information about the rents from the countries that are developing. The moderate market power have effect the bank on taking risk inventive, the monopoly banks have showed the monitoring cost and to raise up the original risky loan portfolio (Amihud and Miller,1998, pp.88-92). Banks who have more power to give loan to the customers charge a high a huge rate of interest from the customers, Which is harder for the borrowers and as well as for the people who are to repay the loans. The competition does not need any mandatory prediction about the effects of the competitions and for the stability of the banks for the developing countries. Whereas the market for the loan can result more risky loan portfolios, it can also protect their franchise by increasing the equity or by getting involved other risk aware techniques. This paper has evaluated three different specified of Lerner investigation for the market implication, and those are: a convectional Learner, an efficiency Learner, and a funding adjusted Learner. The conventional Learner can be defined as the importance of pricing power as it can measures the differences between the price and the marginal cost that are expressed in terms of percentage (Pasiouras, 2013, pp.55-57). The Z-index has the stability at the bank level which indicates the profitability, leverage and the volatility return of the profit that have been invested in the market. It also indicates that higher the return with profit and capitalization can also decrease with variable earnings. The banks with other developing countries regions are Africa, East / South Asia, Pacific Eastern Europe and Central Asia and many more have the financial statements for the year 1999-2005 and which has got comprehensive coverage. The Middle East has the largest banks followed by the East / South Asia and Pacific region, the highest loan average rate is 51% in Latin America and Caribbean ahs the lower loan rate around 39% for the Middle East. The credit bureaus do not play any active role for the developing countries, and the presence of the protection for the investors in the developing countries, the mangers also generating incomes from the other risky way of funds for comparing the loan amount. The banks in the developing countries are average for well capitalised and can be operate in the Middle East region which have the lowest rate of interest and the return on assets. Whereas the high profitability is measured by ROA in the banks of Africa (Gup, 2007, pp.33-36). Econometrics In this paper the author uses several methods to make justified the study. In this first contrast the author uses the convectional Leaner Index, the efficiency- adjusted Leaner Index, the funding-adjusted Leaner Index, the Z-index and the risk adjusted rates of return in the year between 1999 and 2005. The Convectional Leaner Figures have showed many powers in the developing countries where the degrees may vary from all over the countries, in this research paper the figures are normally very closely assigned to the all over the regions of the developing countries. The efficiency adjusted leaner and the funding adjusted leaner in this paper indicating the potential of the US banks and the convectional index is exceeding in overall. The funding adjusted leaner is the average of all and it can be suggested latter generally for estimating the degree of market power and it is also used for the justified use of alternatives (Harris, 2003, pp. 75-79). The cost efficiency used by the author just because to measure the profit efficiency of the commercial banks and to estimating the result of the company w2hich is indicating the cost efficiency levels of the company which are to treated carefully for the profit efficiency. It is stated in the paper that banks in the Middle East are profit oriented rather than the banks in the Latin America and Caribbean. The measures of bank stability pointed that the average banks that are operating are in the countries like the Middle East as they are appearing in the lower risk aware countries and are compared with the bank in the other regions as well. The Z-index and the risk adjusted measure have been used for lowering the rate of interest for the assets earning funds which is depended, and there is more possibility to be stable. This analyzes the Z-scores and the risk adjusted rates of returns. The Z-index and the ROA are used to measures the stability of the bank and have different variables, it include the quadratic term for understanding the relationship between the competition and for the bank efficiency and the stability of the measures. The reflection point at this stage can be calculated very specifically by taking the first order as zero and the values can be initially distributed. To illustrate those points of the quadratic term, more than 99% of the degree for the market power beyond the reflection point. It has been stated that the sign of the first quadratic coefficient have the negative sign and the expected function can be a downward oriented which have decrease above the inflection points. The banks which show a greater portion of their assets exceed the Z-indices, suggesting that the firms are having a higher credit risk which can be exposed at a lower rate of return in overall risk. It can also be the case that banks in the developing countries have a credit policy to hedge the portfolio market which can hold a equity capital (Inadomi, 2010, pp.88-95). Minor Points To reduce the bank risk potential it has to be ensured that the overall stability is in a safer way, this is very important part that the market are in the developing countries are completely non-existence. Whereas the foreign banks do not have any vital effect on the overall exposure of the bank risks. For checking out the result of the bank stability it also shows that the market power is adjusted with the ROA. It indicates the higher the rate of return in the market positively with a larger risk adjusted. The analysis for the developing countries stated that there is a higher degree of the market power which shows a gain and can raise the bank stability of the developing countries. For analysing the marginal effects the higher degree of the market are variable for the interest, it also point out the market power of the return on the assets for the banks. The advantage of the dimensions is to find out the current values of the market power on the effectiveness of the bank and the stability that are addressing the questions that are variable. The banks in the developing countries usually get a high rate of return from the market power, as they do not receive any higher profit and at the same time deriving greater stability of the firms. On different specified variables the World Banks are doing very good business environment which are obtaining from the previous results. Many variables are running to check the sensibility and it also allows varying from all over the world for doing banking globally. Many of the countries have currently having financial liberalized for achieving higher economic growth of the countries, and the banking model is also shifting towards the global banking system for providing a huge range of financial services. Relation between the competition policies and the financial stability is badly maintained by the developing countries, and in this paper it has been examined the impact of the higher rate of return for the bank stability. It has also used 821 banks around 60 of the developing countries. The developing countries, sets a high price to mark the marginal cost which are improving the profit efficiency of the country, the managers who tends to earn a high returns is passing a very good amount of cost to the their customers. As the banks are having the market power they have a very good stability in the firm and can reduced the risk of the banks as well. The most important finding is relevant for the policy maker of the developing countries where the banking system is relevant for the recent financial crisis (Caprio, 2012, pp. 122-130). References Amihud, Y. and Miller, G. 1998. Bank Mergers & Acquisitions. Boston: Springer. Caprio, G. 2012. The Evidence and Impact of Financial Globalization, USA: Academic Press. Dietrich, H. 2009. German Banking Structure. Frankfurt: Peter Lang. Gup, E. 2007. Corporate Governance in Banking. USA: Edward Elgar Publishing. Harris, C. 2003. Private Participation in Infrastructure in Developing Countries. World Bank Publications. Hoose, V. 2009. The Industrial Organization of Banking. USA: Springer. Inadomi, M. 2010. Legal Investment Protection and Consequences. Netherland: Kluwer Law International. Pasiouras, F. 2013. Efficiency and Productivity. UK: John Wiley & Sons. Rudolph, K. 2006. Bargaining Power Effects in Financial Contracting, Switzerland: Springer. Silipo, B. 2009. The Banks and the Italian Economy. New York: Springer. Read More