Competition, concentrations and their impact on operational efficiency of commercial banks

The aim of this study is to test hypothesis about the nexus between competition, concentration in the banking system, and the operating efficiency of commercial banks. In order to test this hypothesis, we formed a sample of some of the leading commercial banks, which account for over 75% of all corporate loans. To assess the operating efficiency of commercial banks in Russia we use data on loans to non-financial sector. Based on the evaluation of correlational relationships between variables, we sought to determine the presence of causal relationships between variables such as "loans", "concentration level" and "degree of competitive pressure." For calculations, we use the formulas and approaches described in several scientific works. [1-5]

For analyzing the results of testing the first hypothesis about relationship between operational efficiency of commercial banks and competitive pressure, let’s refer to Table 1.

Table 1. Results of estimating competitive pressure on Russian credit market

All sampled banks (loans to non-financial sector,%)

Bank	2009	2010	2011	2012
Sberbank	25,82	-4,94	17,85	32,41
RSB	60,84	30,25	21,51	19,89
VTB	72,77	-6,91	6,85	24,82
VTB 24	18,87	-3,36	0,01	30,12
Gazprombank	89,94	-14,45	30,76	30,52
Alpha-Bank	18,56	-13,00	33,50	19,56
FC Otkrytie	25,64	-13,75	53,47	22,07
Promsvyazbank	29,68	-5,88	19,40	19,60
MKB	31,33	65,85	87,90	48,98
MINB	23,6	32,28	38,15	20,33
Nordea	111,94	-11,81	27,28	29,83
Rosbank	49,07	-29,89	-2,76	49,71
Raifaisenbank	18,26	-27,09	29,26	11,86
Citybank	11,66	-34,32	96,99	43,63
UKB	38,36	-12,37	11,14	13,84
Competitive pressure index (CPI)	875,4352971	708,083921	831,7239352	140,1118838

Source: author’s own calculations

The definition of "herd behavior", according to methodological table, is in range:

• •    from 0 to 25 - a high degree of coordination of players on the market;

• •    from 25 to 60 - average level of coordination;

• •    more than 60 - lack of coordination of players' actions, an independent credit policy.

The index values for the selected time period greatly exceed the possible criteria, so the relationship between efficiency of banks and patterns of herd behavior are absent.

Let’s test the following hypothesis about the relationship between the concentration of the banking sector and competition on the credit market (in the banking sector). For this purpose we use the auxiliary Table 2.

Table 2. Statistics on HHI and CPI for Russian banking system

Variable/Year	2009	2010	2011	2012
Hefindahl/Hirschman Index	1,6260162	8	-7,40740741	6,4
CPI 1 (for all samples banks)	875,4353	708,083921	831,7239	140,111883
CPI 2 (for private banks only)	0	11166794,	34322,02	16916,8892

Source: author’s own calculations

Based on the data, we construct two scatter plots.

• Figure 1.    Correlation estimate between concentration and competition for all sampled banks

R2

= 0,2717

-10         -8          -6          -4

-2

4         6         8         10

Source: author’s own calculations

• Figure 2.    Correlation estimate between concentration and competition for only private banks

  

Source: author’s own calculations

We should pay attention to the indicator of the reliability of approximation (R^2 ). If it approaches close to 1, the relationship is a strong one, if it tends to 0 – a variable does not explain sufficiently the trend of resulting variable.

As we can see from the graphs, the explanatory variables count for only 30% of resulting variable, that is not enough to recognize a linear relationship.

The latter hypothesis was also not approved. In this regard, we can draw the following conclusion. Neither the degree of competitive pressure nor concentration of the banking sector does have a sufficient explanatory power to describe the differences in lending by commercial banks in the Russian corporate segment, which generates a need for further research on the issue.