Part A. Bank as financial intermediary

Lecture 2. Concentration and

competition in the banking sector

The Romanian banking sector

Outline

(1) Banking market concentration

(2) Banking market competition

(3) Case study. The Romanian banking

system

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Concentration and competition in the banking sector

Recent trends in global banking:

mergers among foreign banks and cross-border mergers

globalization

financial conglomeration

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Concentration and competition in the banking sector

In the past decade the banking industry faced a

widespread consolidation (through mergers and

acquisitions, M&As) especially in emerging

economies.

Consequences

a decline in the number of smaller banks;

large multinational banks play an increasing role in

domestic banking markets.

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Concentration and competition in the banking sector

Incentives for M&As

Economies of scale are achieved by creating a combined institution of larger size

capable of achieving lower unit costs of producing financial services.

e.g., consolidation of the credit department and branch delivery system

Economies of scope can generate cost savings from delivering services jointly

through the same organization rather than through specialized providers.

e.g., both banking and insurance products supplied by the same institutions

Eliminating inefficiencies. Cost efficiency can be considerably improved by

takeovers in which relatively more efficient banks acquire relatively less efficient

banks and increase the efficiency of the target bank after the operation.

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Concentration and competition in the banking sector

Globalization

Global banks are the institutions with the widest reach, that is,

either through subsidiaries or branches they provide services in

several world countries and have a presence in all continents.

International banks provide cross-border services, but operate in

too few countries, or are relatively too small, to be defined as

global. Such banks are also referred to as regional banks.

Local banks are institutions providing services only in the country

where it is headquartered.

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Concentration and competition in the banking sector

Financial conglomeration

a group of enterprises, formed by different types of financial

institutions, operating in different sectors of the financial industry.

Benefits

the possibility of exploiting greater cost economies

the capacity of the group to isolate risk from its different activities

the ability to distribute a full range of banking, securities and insurance

services may increase their earning potential and lead to a more stable

profit stream.

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Concentration and competition in the banking sector

Measurement

Concentration index (top 5)

Competition index – HHI (all banks)

for:

Total assets

Gross loans

Customer deposits

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(1) Banking market concentration

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(1) Banking market concentration

Index Definition

Total Assets concentration

(top 5)

Share of total assets of the

five largest banks

Gross Loans

concentration (top 5)

Share of total gross loans

of the five largest banks

Customer Deposits

concentration (top 5)

Share of total customer

deposits of the five largest

banks

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(1) Banking market concentration

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A market with a Concentration index less than

30% is low concentrated marketplace

a Concentration index of 30%-60% indicates a

moderately concentrated market

a Concentration index of 60% or greater indicates

a highly concentrated market

(2) Banking market competition

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(2) Banking market competition

Index Definition

Herfindahl-

Hirschman

index

It is calculated by squaring

the market share of each bank

competing in a market, and

then summing the resulting

numbers, in terms of total

assets, gross loans and/or

customer deposits.

where si is the market share of the ith

bank: si=TABank i/TAsystem*100, or

si=LoansBank i /Loanssystem*100, or

si=DepositsBank i/Depositssystem*100

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(2) Banking market competition

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A market with a HHI less than 1,000 is a

competitive marketplace

a HHI of 1,000-1,800 indicates a moderately

competitive market

a HHI of 1,800 or greater indicates a low

competitive market

Application 1. The impact of merger between

Transilvania Bank and Volksbank on the

competition in Romanian banking system

Application 2. The impact of merger between two

banks (from top 10) on the competition in

US/China/UK/Spain banking systems

!!! Homework

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The Erste Bank Group across Europe

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Societe Generale across the world

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Banks of China across the world

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(3) Case study. The Romanian banking system

3.1. National Bank of Romania

3.2. Commercial banks

3.3. Support institutions

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3.1. National Bank of Romania

NBR’s attributions target the following areas:

monetary policy (inflation targeting);

exchange rates (reducing volatility in the foreign exhange

market, but not artificially maintaining "favorable" courses);

authorization, regulation and prudential supervision

of credit institutions;

supervision of payment and settlement systems in

national currency.

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3.1. National Bank of Romania

Banking prudential supervision

Financial instability can lead to the manifestation of the financial

crisis, with profound negative effects on the real economy

speculative bubbles

stock market crashes

increased credit risk and a prudential/caution attitude of on the

granting new loans

reduced household and corporate financing

contraction of investment and consumption

higher unemployment rates and lower gross domestic

product (GDP)

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3.1. National Bank of Romania

The prudential supervision model of NBR:

(1) countercyclical regulatory policy;

(2) prudential standards more stringent than those

recommended at the European level (solvency and capital

adequacy).

=> In Romania there were no bankruptcy cases in the banking

sector during crisis.

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3.2. Commercial banks

Structural indicators of the Romanian banking system

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3.2. Commercial banks

Credit institutions’ share capital as a percentage of total capital and their

market share by country of origin

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3.2. Commercial banks

Market share and number of credit institutions with foreign

capital (international comparison)

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3.2. Commercial banks

Number of bank branches and employees

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3.2. Commercial banks

Financial intermediation (international comparison)

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3.2. Commercial banks

Asset concentration (international comparison)

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3.3. Support institutions

Clearing house

Casa de compensare (Transfond)

Deposit Guarantee Fund

Fondul de Garantare a Depozitelor în Sistemul Bancar (FGDB)

Credit Risk Bureau

Centrala Riscurilor de Credit (CRC)

Credit Bureau

Biroul de Credit (BC)

Payment Incident Bureau

Centrala Incidentelor de Plăţi (CIP)

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