Prudential regulations, restructuring and competition: the case of the Argentine banking industry

Abstract

The Argentine banking industry has experienced a deep restructuring process since the beginning of Convertibility, when the industry was opened to competition and new prudential regulations were put in place in order to improve its solvency. Jointly with a dramatic increase in banking output, prompted by macroeconomic stability, the number of firms operating in the industry declined significantly. We analyze the extent to which this restructuring process has reduced the level of competition in the industry and we investigate the effects of regulations on bank profitability. Using panel data we try to explain the differences in profitability among the 20 largest retail banks. We construct concentration as well as market share indices by banks, to determine the degree of competition they face in local markets. Efficiency measures are also included as determinants of bank profitability in order to test if differences in profitability are due to these differences rather than to market power or concentration. The results indicate that there is no evidence of market power in the retail-banking sector. Regarding concentration, in the more populated areas of the country, were financial markets are more developed, the degree of concentration is very small. Given this result, the finding that banks whose business is mainly located in these areas earn lower profits, is an indication that the degree of competition in these areas is high. It is also true that the most X-Efficient banks mainly operate in more populated and developed areas. On the contrary, in the less populated areas, where financial markets are poorly developed, concentration is higher and banks that operate mainly in those markets earn higher profits and are less efficient. Finally, while banks with higher liquidity as determined by their liability structure earn lower profits, the effects of capital requirements on profitability are not clear.