The Degree of Competition in the Thai Banking Industry before and after the East Asian Crisis

Article excerpt

I. Introduction

The purpose of this paper is to investigate how the 1997-98 East Asian crisis and the subsequent reforms affected the degree of competition in the Thai banking industry. Through the reforms, the industry has undergone substantial changes in terms of the ownership of banks and of regulations. In many banks, family ownership has been replaced by state and foreign ownership. The banking sector saw several entrants during the reforms, a phenomenon that had been absent for more than twenty years before the crisis. Despite these developments, a casual observation of loan market share suggests that the oligopolistic nature of the industry remains unchanged. (1) Before as well as after the crisis, the six largest banks accounted for 70 per cent of total loans of the consolidated banking sector. The rather stable market share of the large banks, despite the reforms, forms the background of the present analysis on the behaviour of leading Thai banks.

To estimate the degree of competition, we apply the method devised by Bresnahan (1989). Using estimation models based on microeconomic foundations, this method allows us to derive the index of the firms' market power that is calculated as the deviation of the market price from the marginal cost. Several studies have applied this method to the analysis of the banking industry, and these have often found that banking industries cannot be regarded as being in perfect competition. One of the earliest studies is that of Shaffer (1993) on the Canadian banking industry. She used time series data for the aggregated banking sector, and estimated an average degree of competition over a long period of time. (2) Bikker and Haaf (2002) applied the same method to the banking industries of the European countries. While the estimation based on time series data yields only an average degree of competition for a long period, panel data from the financial statements of individual banks allows us to estimate the industry-wide average degree of competition and to evaluate its year-by-year evolution. The latter method has been applied by Angelini and Cetorelli (2003) to the Italian banks, and by Uchida and Tsutsui (2005) to the Japanese banks. (3) Our study also employs panel data in our case data relating to the Thai commercial banks during the period 1992-2004. By estimating parameters of a market power index for consecutive years before and after the crisis, we evaluate the year-by-year evolution of the degree of competition.

The present paper contributes to the empirical literature on the Thai banking sector. Among existing studies, in contrast to the abundant literature that outlines the financial reform measures that followed the 1997-98 East Asian crisis, (4) there are relatively few quantitative analyses of the structural changes that have occurred in the banking industry. Among the few existing studies, Anuchiworawong, Souma, and Wiwattanakantang (2003) and Polsiri and Wiwattanakantang (2005) describe the decline of family ownership of banks from the perspective of corporate governance. In their study relating to foreign bank penetration through the reforms, Okuda and Rungsomboon (2004b) analyse the effects of foreign bank entry on the banking industry, and find that an increased presence of foreign banks in terms of number of banks is associated with a rise in overhead costs, a decline in profits, and an increase in the interest spread of local banks. (5) In contrast to the narrow focus of Okuda and Rungsomboon (2004b) on the effects of foreign bank entries, we consider the effects of the reforms, including changes in the ownership structure, on the degree of competition.

The organization of this paper is as follows. The next section describes changes in the Thai banking industry during the crisis and reforms that might affect the degree of competition. Our econometric model is presented in section III, and section IV discusses the results of estimation. …