healthy economy depends on a good working financial system without any
unbalanced or any negative expectation in the future because financial system is
the first sources for the foundation of investments. For these reasons, the
efficiency of financial products (production or services) and a competitive
environment is very crucial for banking sectors, similarly other sectors.
There are mainly two hypotheses which are used in
the literature about the relationship between competition and stability in the banking
sector. They are competition-fragility and competition-stability. First hypothesis
claims that smaller banks, in more competitive environments, are more likely to
take excessive risks and therefore competitive systems are more fragile than
less competitive systems (Matutes and Vives, 2000).
On the other hand, Boyd and De Nicolo, (2005) claims that
“there is a risk-incentive mechanism
causing banks to become more risky as their markets become more concentrated”.
The authors called it as “competition stability” suggested less competitive
banking environment may cause fragility in competition-stability hypothesis
Boyd and De Nicolo, (2005). Because a less competitive banking environments
allow banks to increase the interest rate charged to firms (borrowers), firms (borrowers)
had probably have difficulties in re-paying their loans. As consequence of it
in a higher probability of nonperforming loan ratios (NPL), and more
competitive environments are considered to be permit greater stabile banks. “Their theoretical model shows that the
higher interest rates may cause firms to assume higher risk, which results in a
higher probability that loans turn non-performing (Leon,2015). According to
Boyd and De Nicolo’ (2005) study, there is a positive relationship between bank
fragility and concentration resulting a greater probability of systemic distress
because of concentration.
There are very
broaden empirical studies in the literature. Some studies evaluate bank
fragility from a macro perspective and take into account systemic banking crises
e.g. Beck, Demirguc-Kunt and Levine, 2006. On the other hand, micro-based
studies generally support the competition-fragility hypothesis. In the banking
literature simply take the concentration ratios, while others use indices such
as the Herfihndahl-Hirschman Index (HHI), Lerner, Tobin, and Panzar and Rosse (1987)’ H-statistic.
Even if there
are very broaden empirical studies examining banking sector, it is not the case
for Turkish Banking Sector. Also Turkish economy had hit by 2 crucial economic
crises between 1999 and 2001. In 2004, Turkish economy began to stabilization. Therefore,
the primary purpose of this study to investigate whether there is a competition
environment for Turkish banking Sector after stabilization until today (see the
section II). Also, I will research the impact of 2007 Global Financial crisis.
This study is organized as follows; in the section-II the historical change of
the Turkish Banking sector is given. In the section-III, the data set is
explained, then in section IV method is represented. In section V the analyses
results are given.
Banking Sector’s History
Ziraat Bank was established to support agricultural sector in
Turkey in 1863.
After the declaration of independence of Turkey in 1923, the
development in banking sector was evaluated at Izmir Economy Congress ( Akbulak
and al, 2004).
Turkiye Is Bank which had 100% nationally capital, was
established in 1924.
Central Bank of the Republic of Turkey
is the central bank of Turkey and is founded as a joint stock company on 11
June 1930 (http://www.tcmb.gov.tr/).
Just after World war- II (1939-1945),
the depression in the market due to the war, impacted on the banking sector.
The privately owned deposit banks were
developed in Turkey between 1945 and 1959. For instance Yapi Kredi Bank,
Garanti, Ak Bank, Pamuk Banks were some of the privately owned banks established
in these periods (Akbulak and al, 2004).
Turkish Banks Association was
established in 1958. After a year, the years between 1960 and 1980 was called
“planned term”, since these 2 decades banks were controlled by the
1960-1980, 7 banks were founded by
government based on the “planned term”, 2 of them were merchant banks
and others were development banks.
With adaptation of free market economy
model in 1980’s, banking sectors’ privatization increased in Turkish Banking
1999-2001 can be considered years of transformation for Turkish
banks. In the 3 year of period, the Turkish economy had been faced by two crucial
economic crises (Yaldiz and Bazzana, 2010).
The parliament approved the new banking law (no 4389) in 1999. By
this law The Turkish government guaranteed on deposits, which had been set at
100 % for the year 1994 was restricted to 100,000 Turkish liras (TL) in 2000.
In 2001 the guaranteed deposit amount was restricted to 50,000 TL
2014). Same year, IMF started a Banking Restructuring Program purposing
efficient banking system.
According to Tunay, 2009 study the restructuring program impacted
sector in a negative way.
In Turkey, there were 81 banks operating in 1999.
After 2004, with the stabilization of the economy,
the privatization gave a momentum. Currently, 51 banks are involved in Turkish
Banking sectors, 3 of them are public deposit, 11 private deposit, 16 foreign
deposit, 4 public investment, 5 private investment, 4 foreign investment, 4
participation banks, and 2 banks under the supervision of the Savings Deposit Insurance Fund of Turkey (SDIF)
(wikipedia/list of banks).
Existence of 51 banks raised the competitive environment. A competitive area in
banking sector can lead to lower prices for services and products due to
greater efficiencies. Also, greater innovation and access to services and
products. On the other hand, banking sector extension may reduce to supervise
these institutions. For these reasons, in this paper I analyze Banking Sector’s
efficiency and the market power of Turkish banking sector.All data sets will be retrieved from The
Banks Association of Turkey (www.tbb.org.tr) which are publicly available. The
data set includes between 2005 and 2013 data. Since the economical
stabilization process began in 2004, so I chose just after the stabilization
term. Also, the last quarter of 2014 data set was not available during the study
period, thus I used 2013 data set. These 9 years period panel data set include
all assets, deposits, funds for all 49 (excluding SDIF banks) banks. I
specifically chose the 9 years period. The all period is separated into 2 sub-groups
for evaluation the global financial crisis impacts on banks
competitveness. The first subgroup includes precrisis term (2005-2007), and the
remain term is postcrisis (2008-2013). Moreover, I examined the competitiveness
among different types of bank groups to determine their market power
difference. For this purpose, I seperated all data set as private-owned and
Method Lerner Index1 is
widely used in the specific case of banks as an indicator of degree of
competition in banking sector. The Lerner index’s marks-up the price over
marginal cost. The value of index ranges between 0 (perfect competition) to 1
(Monopoly). In other words, Lerner index measures the monopolist’s margin.
Lerner index is calculated as follows equation-1;
Where p- price, MC is marginal cost and e is price
elasticities of demand. If p is equal MC, then the firms operate in perfect
competition (L=0). If L is greater than 0, then Lerner index indicates the
existence of market power. Thus, the
Lerner index can be explained by,L=0
Monopoly Power (or Oligopoly Power)L<0 Either firm not max profit or engaging in predatory activity. The measurement of Lerner index in the banking industry calculates depending on the Monti-Klein profit function for a bank. This model also examines the behavior of a monopolistic bank faced with a deposit supply curve and loan demand curve. The bank's decision variables are the amount of loans and deposits and level of capital is assumed to be given. Here banks are considered to be a price taker in the inter-bank market. The Monti-Klein profit function is given by equation-2 as follows; Where rl is the interest rate on loans, L- loan size, rD-intereset rate on deposits, D-deposit size, r interest rate on the inter-bank market. The first order condition: Equation 3 and 4 represent the extend that the monopolist's market power allows it to fix a price above marginal cost, expressed as proportional to the price. If we consider the extreme case of the perfect competition, the Lerner Index value will be 0. It means that there is no monopoly power. The relative margin instead of absolute margin is the most significant diagnose of competition (Maudos and Guevara, 2004), and oligopoly competition models determine a relation a relationship of a equilibrium between the negative margin and the structural and competitive condition of the market. Furthermore, the relative margin offers a proxy for the loss of social welfare that is due to the extension of the market power (Maudos and Guevara, 2004). If the model is extended considering to oligopoly (more than 1 banks in the banking sector, N banks), the following equations are the first order conditions (Freixas and Rochet, 2008); this is different from the case of monopolly only in that elasticities are multiply by the number of competitors (N). The marginal cost which is required to calculate the Lerner Index, is estimated on the based on translog cost function (Berger and Mester, 1997) Where y is total assets, Wi is input prices, W1- the price of labor, W2- the price of capital, W3- the price of funds and TC is the bank's total costs (financial and operating costs), After calculation of total costs, the MC are calculated by derivation of the cost functio by y; According to De Geuvara et all (2007), the input price in the banking sector is assumed to be interest revenue divided by assets for each bank in the period of t. II. Analysis Results Lerner Index is calculated by using the general equation (equation-1). To obtain the marginal cost, equation-7 and 8 are applied. The calculation results are represented in the Table-1. The results show after 2008, there are significant increases in the Lerner index. It means that the competition among banks has been decreasing after 2008. I also separated bank sector based on bank's type. If more than 50% assets of a bank belongs to private owner (including foreign assets), it is called private-owned bank, otherwise the bank is a state-owned bank. Considering these 2 types of banks groups, the results of Lerner index are given in Table-2. It is clear from the Table-2 that state-owned banks have lower Lerner index value than private-owned banks. Therefore, it can be said that state-owned banks are acting in a more competitive area for these 9 years periods. Also, the comparison of the 2 different banks groups' Lerner index are given on Graph-1. I. Conclusion In this study, I investigated the competitiveness level in Turkish Banking Sector. In the sector, state-owned and private-owned banks are investigated, as total 49 banks are examined. For these each of the banks, I calculated their marginal cost by using Translog cost function (equation-7), then the Lerner Index is calculated. I applied at the same process for each of the banks for 9 years period. On the base of test an obvious market power was found between state-owned and private-owned banks. Also, there is a significant difference when comparing the behavior of Turkish Banks between 2 sub periods (2005-2007,2008-2013). This means that the Turkish Banking Sector does not act in a competitive environment, they enjoyed the oligopoly power for these 9 years periods. As consequences, the Lerner index was at highest level found in 2009, I believe this was a reflection of Great Financial Regression in the world's other markets. Post crisis period, many financial markets were trying to keep balance, since Turkish Financial market was a stabile and trustable market, it is highly probable that many assets transferred to the market. It means that the assets gave a positive momentum to Turkish banking sector. Therefore, Turkish Banking sector may be investigated by separating foreign assets, especially post crisis years. Even if the evidence pointed out the banks have not been acting in a competitive area, the situation may be changed after the foreign assets are separated.