Market structure and efficiency in ASEAN banking
The increasing importance of the relationship between market structure and bank performance in general, together with the lack of empirical research on this relationship in the Association of South East Asian Nations (ASEAN) banking markets, provide the main motivation for this study. Many researchers have sought to estimate the relationship between aspects of market structure such as concentration and market share, and indicators of bank performance such as profitability and prices. However, there is still no consensus with regard to the most appropriate theory in the light of the empirical data. In this study, the possible relationships between market structure and bank performance suggested by prior research are examined for the five main banking markets in ASEAN, i.e. Singapore, Malaysia, Thailand, the Philippines and Indonesia, for the period 1991 to 1995. This relationship is tested using pooled and cross sectional estimate, as well as on a country by country and year by year basis. This is the first study in which data for all five ASEAN countries has been analysed. The database which has been constructed for the present study has been obtained from a variety of primary sources, supplemented by commercial data services, thus providing the cross-national set of comparable data needed for the modelling of bank efficiency that is reported in this thesis. The study uses two measures of efficiency; (i) the standard accounting approach, i.e., the cost-toincome ratio, and (ii) the stochastic X-efficiency measure. Using the cost-to-income ratio as a proxy for efficiency, generally the pooled results suggest that both the Relative Market Power and the Relative Efficiency hypotheses may explain the profit-structure relationship in ASEAN banking markets. That is, firstly, market share appears to reflect market power, the larger firms in the market gaining higher profits; secondly, banks operating at higher levels of efficiency are also able to gain higher profits. Using the stochastic X-efficiency measure, the pooled results also provide support for both the Relative Market Power and Relative Efficiency hypotheses. In addition, we find that, overall, government ownership and market demand conditions are negatively related to bank profitability, whilst the level of risk capital is positively related. The individual country estimates suggest that Relative Market Power is supported only in the Philippines using the cost-to-income ratio and in the Philippines and Indonesia using the stochastic X-efficiency measure. Moreover, Relative Efficiency is also supported only in the Philippines and Indonesia using stochastic X-efficiency. In contrast, using the cost-to-income ratio, the Relative Efficiency hypothesis is supported in all five ASEAN countries which would imply that, in the region as a whole, bank efficiency is the primary driver of higher profits.