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Minggu, 27 Juli 2008

CONCENTRATION, COMPETITION, EFFICIENCY AND PROFITABILITY OF THE TURKISH BANKING SECTOR IN THE POST-CRISES PERIOD

Abstract

After 2001 crisis, the macroeconomic environment led to important changes in Turkish banking sector which has experienced a process of concentration by involving in merger and acquisition activities and liquidation of some insolvent banks. Using the data from the detailed balance sheets of the banks that operated in the years from 2001 to 2005, we examine the degree of concentration and degree of competition in the market by applying Panzar and Rosse's approach. We also explore the existence of relationship between efficiency and profitability of the banks taking into account the internationalization of banking. Our results do not suggest the existence of relationship between concentration and competition. There is also no robust relationship between efficiency and profitability.

1. Introduction

Banks play a substantial role in capital accumulation, firms' growth and economic prosperity. Hence, research on concentration, competition, efficiency and profitability of the banking sector has important policy implications. In investigating the relationship between the concentration and competition in banking sector there are two competing approaches: the Structure-Conduct-Performance (SCP) hypothesis and the Efficient-Structure hypothesis. The former states that the higher the concentration in a market is, the lower is the competition and the higher profits that the firms receive. The latter takes the efficiency factor into account and states that the firms with superior efficiency improve their market shares and become more profitable.

Berger and Hannan (1989) found consistent empirical results with the implications of SCP hypothesis. While Bikker and Groeneveld (2000) conclude that the increase in the degree of concentration in the European banking sector is negatively related to competition, Jansen and Haan (2003) found no evidence that concentration indicators are linked to profitability, and added that concentration and competition are not related. Smirlock (1985) also states that there is no discernable positive relationship between concentration and profitability. Yeyati and Micco (2007) further suggest that it is not at all clear whether competition and concentration should go in opposite directions. For the Turkey's banking sector, dominance, disparity and dynamic indexes are employed in addition to static measures in order to analyze market structure more comprehensively. According to the findings of this study, concentration showed an increasing tendency in 20002005. However, net interest margins which can be seen as the relevant prices in the sector (as an indicator for the measure of competition) declined.

While the literature generally focuses on scale and scope economies, more recent literature has attempted to evaluate X-efficiencies1 in various European banking markets (Altunbas, 2001; Berg, 1993). Berger and Humphrey (1994) state that X-efficiency is more important than scale and scope economies taking into account the managerial ability to control costs. Isik and Hassan (2002) employ Data Envelopment Analysis (DEA) to investigate efficiency in the Turkish Banking sector and found out that foreign banks operating in Turkey seem to be significantly more efficient than their domestic peers.

Beside Berger (1995), in exploring the relationship between profitability and efficiency, Turati (2003) does not employ a proper regression analysis. He computes simple correlation coefficients between efficiency scores and different measures of bank profitability. According to this study, correlation coefficients between ROE and efficiency scores, and between ROA and efficiency scores are substantially close to zero for all the three models. These findings suggest that there is no linear relationship between profitability and efficiency. Turati (2003) also observed that for some European countries there is a negative correlation between efficiency and profitability. He interpreted this as a surprising result since the more inefficient banks were also the more profitable ones. Berger and Hannan (1998) stated that monopolists earned higher profits and given the absence of competitive pressures, were also characterized by a higher level of inefficiency.

After the November 2000 and February 2001 crises in Turkey, the new macroeconomic environment led to important changes in the banking sector1. The rise in the interest rates, depreciation of the Turkish Lira and the contraction of economic activities adversely affected the profitability of the banks. With regard to financial and operational resurrection attempts in the scope of the Banking Sector Reconstruction Program, the number of banks, branches, and employees were reduced. The equity structures of the private banks were strengthened and merger and acquisition activities were promoted with tax incentives. In 2001, eight banks2 were acquired by Saving Deposit Insurance Fund (TMSF), seven banks3 were merged, and the licenses of three banks4 were revoked. In the private sector, several banks5 engaged in mergers and acquisitions activities. After these mergers and acquisitions, concentration increased in the banking sector. In 2002, Pamukbank was acquired by TMSF. In 2003, Imar Bankasi entered into the liquidation process upon revocation of its license to perform banking activities and accept deposits. Fiba Bank was transferred to Finans Bank, ING Bank and Credit Suisse ceased their activities in the Turkish Banking sector. In 2004, Pamukbank was merged with Turkiye HaIk Bankasi. In 2005, the tendency for merger and acquisition activities kept reducing the number of banks in the sector and increasing the concentration. Fortis Bank acquired Turkiye Dis Ticaret Bankasi6.

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