Competition in the Chilean Banking Sector: A Cross-Country Comparision

"This paper, by Meral Karasulu, measures the degree of competition in the Chilean banking sector. This question has traditionally been addressed by measuring the degree of concentration in the sector. However, the relationship between concentration and competition is thin with regard to the banking sector. The United Kingdom, for example, has one of the most competitive banking sectors in the world, yet a handful of banks controls the market. Nevertheless, the question regarding the connection between concentration and competition remains. In light of this conventional wisdom, it is not surprising that ""the concentrated structure of the Chilean banking market has raised concerns of insufficient competition in the sector."" Karasulu compares the Chilean banking sector with thirty other countries, using bank-level data covering ten years starting in 1995. She follows Panzar and Rosse, who measured the degree of competition as a function of the elasticity of revenues to the different factor prices.1 This methodology is not concerned, therefore, with concentration or profits per se but with how revenues [End Page viii] and profits respond to changes in the bank's costs. The paper reports that the Chilean banking sector is concentrated and the degree of competition is smaller than in the other countries in the sample. Chilean banks also have larger profits: after controlling for the relevant macroeconomic characteristics, Karasulu finds that their margins are about 2 percentage points higher than the rest of the sample. This paper has important implications for bank regulation. Far too much emphasis is given to market share and too little is given to the actual behavior of banks, which is measured by the elasticity of revenues to factor prices. Karasulu calls for changes in regulatory approaches to the banking sector while pointing out the need to analyze the financial sector as a whole. Future research will certainly follow her suggestions."