The State of Competition of the Turkish Banking Industry: An Application of the Panzar-Rosse model/Konkurencija Turkijos Bankininkystes Sektoriuje: Panzar-Rosse Modelio Taikymas
Aktan, Bora, Masood, Omar, Journal of Business Economics and Management
In recent years, a continuously increasing number of papers have investigated competition in the banking industry. Globalizations and the liberalization of financial markets have raised broad interest in this topic. Obviously, competition in the banking sector has a major impact on the wealth of consumers and companies and affects the performance and financial condition of the banks. This further initiated the mergers among banks and other financial institutions causing drastic changes and competition in the structure of the banking industry.
Turkish banking industry forms a great part of the whole financial system in the country's dynamic economy. Most of the transactions and activities of money and capital markets are carried out by banks. Most State banks were established to finance a particular industry such as agriculture i.e., Ziraat Bank, but private banks generally have close connections to large industrial groups and holdings.
How have competitive conditions in Turkey changed the overall banking and regulations in the country in the last decade? By the scope of this paper, we answer this question by using econometric techniques to examine the nature of competitive conditions in the market of the major Turkish banks.
One of the most popular methods used to assess the competition in the banking industry is the Panzar and Rosse Model. Seminal articles by Rosse and Panzar (1977), Panzar and Rosse (1982, 1987) provide an excellent framework for assessing degrees of competition in the banking industry. However, the empirical translation of this approach into an econometric specification is ambiguous and allows for some degrees of freedom. The model uses cross-sectional data to assess the competitive behavior of banks based on the comparative static properties of reduced-form revenue equations. It explains revenues from input prices, among other factors. In this setting, the sum of the elasticities of a bank's total revenues to its input prices provides a pivotal statistic to test for monopoly and perfect competition. Moreover, under certain assumptions this statistic can also serve as a measure of the degree of competition in the banking sector.
The motivation behind our research is, limited literature tackling the market structure of the Turkish banking sector. This study contributes to the literature on market structure in Turkish banking systems by using a larger sample of banks over a significant amount of time. As we measure the competitiveness through our dataset collected from 17 major banks in the Turkish banking sector. It helps us to relate the contestability indicators and to explain differences in the degree of competition across Turkey. The aim of this research is to provide empirical evidence on the level and evolution of competition in the Turkish sector. For this purpose, we employ Panzar-Rosse model, which enables calculation of a measure of market structure, the /-statistic, as the sum of the elasticities of total revenues of the bank with respect to its input prices.
The paper is organized as follows: Following the introduction, Section 2 discusses the previous studies, Section 3 presents a brief situation of the Turkish banking system, Section 4 introduces the Panzar-Rosse Model and the characteristic of the data used in the paper, Section 5 provides the empirical findings and Section 6 finally concludes with a short summary.
2. Previous Studies
The theory of contestable markets developed by Baumol et al. (1982) stated that oligopolies and monopolies sometimes behave very much like perfectly competitive firms. There have been few applications of the contestable markets theory on the banking industry. Studies by Shaffer (1982, 1983, 1994), Nathan and Neave (1989) and Molyneux et al. (1994, 1996) are the most significant among many others. They employed tests developed by Rosse and Panzar (1977) and Panzar and Rosse (1987) to examine the competitive conditions in the banking industry in the U. …