How does the market structure in a banking sector affect bank profitability during a financial crisis?

Abstract

This thesis studies how profitability in both emerging and advanced economies is affected by market structure in a financial crisis. The country sample from Mirzaei, Moore, & Liu (2013) is used with a similar methodology, with the distinct difference of using all banks rather than simply active banks, to enable a comparison to the time period 1999-2008. A sample of 1328 banks in 40 countries, 17 advanced countries and 23 emerging countries, from 2005-2014 is used with 934 banks from advanced countries and 394 banks from emerging countries.

None of the market power hypotheses, the relative-market-power hypothesis nor the structure-conduct-performance hypothesis, are found to be significant for the crisis period 2008-2010. Instead in advanced economies market concentration is a negative determinant of profits in the financial crisis period 2008-2010, indicating that a high market concentration reduces stability and profitability for the banking sector in advanced economies. In contrast, emerging economies find market concentration as a positive determinant of profitability and market share of the bank as negative. The banks in a concentrated market seem to be able to perform better, but the largest banks are more negatively affected by the financial crisis, resulting in lower profitability. The result of both economies for the entire sample period 2005-2014 is equivalent to the market structure-profit relationship found in emerging economies during the financial crisis period. No signs are found of a market structure and profitability relationship after the crisis, which indicate that something other than market structure mainly affects profitability today. A survivorship bias is present when only including active banks, which speaks for the importance of not excluding data in market structure-profit research.