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Financial Stability, Competition and Efficiency in Latin American and Caribbean Banking

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  • Adnan Kasman
  • Oscar Carvallo

Abstract

Using a sample of 272 commercial banks from fifteen Latin American countries for the period 2001–2008, we estimate cost and revenue efficiency scores, financial stability scores (Z-scores) and competition scores (Lerner indexes and Boone indicators) at the bank level. The Granger causality technique in dynamic panels is used to establish dynamic relationships among these variables. We find evidence that strongly supports the “quite life” hypothesis, while we also find partial support for causality running in the opposite direction. Moreover, the results suggest that more competition is conducive to greater financial stability (when the revenue efficiency score is used). Banks seem to achieve market power through better efficiency, leverage and earning ability. As size and complexity increase, however, agency problems and increasing risk-taking might start gaining momentum, generating inefficiency and fragility.

Suggested Citation

  • Adnan Kasman & Oscar Carvallo, 2014. "Financial Stability, Competition and Efficiency in Latin American and Caribbean Banking," Journal of Applied Economics, Taylor & Francis Journals, vol. 17(2), pages 301-324, November.
    • Handle: RePEc:taf:recsxx:v:17:y:2014:i:2:p:301-324
    DOI: 10.1016/S1514-0326(14)60014-3
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    Cited by:

    1. Mariarosaria Agostino & Lucia Errico & Sandro Rondinella & Francesco Trivieri, 2024. "Leverage and SMEs financial stability: the role of banking competition," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(2), pages 345-376, June.
    2. Guidi, Francesco, 2021. "Concentration, competition and financial stability in the South-East Europe banking context," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 639-670.
    3. Pradhan, Rudra P. & Arvin, Mak B. & Nair, Mahendhiran & Bennett, Sara E., 2020. "Unveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 74-87.
    4. Moses Nyangu & Nyankomo Marwa & Ashenafi Fanta, 2023. "What drives financial stability? the nexus between market power and bank efficiency within the East African Community," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 21(3), pages 403-428, July.
    5. Elena G. Shershneva, Min Zhou Hao, 2024. "Russian Banks Financial Stability Loss Diagnostic: Multidimensional Logit-Model Approach," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 23(2), pages 476-498.
    6. Nicholas Addai Boamah & Emmanuel Opoku & Kingsley Opoku Appiah, 2022. "Efficiency, foreign banks presence, competition and risk exposure of banks in middle-income economies," SN Business & Economics, Springer, vol. 2(8), pages 1-21, August.
    7. Nguyen, Thanh & Nghiem, Son & Bhati, Abhishek Singh, 2024. "Risk-adjusted efficiency and innovation: an examination of systematic difference and convergence among BRIC banks," Economic Systems, Elsevier, vol. 48(1).
    8. Maghyereh, Aktham I., 2018. "Bank Competition, Concentration and Risk-taking in the UAE Banking Industry," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 71(2), pages 129-148.
    9. Arben Mustafa & Valentin Toçi, 2017. "Estimation of the banking sector competition in the CEE countries: The Panzar-Rosse approach," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(2), pages 459-485.
    10. Carvallo, Oscar & Kasman, Adnan, 2017. "Convergence in bank performance: Evidence from Latin American banking," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 127-142.
    11. Elisabete Nogueira & Sofia Gomes & João M. Lopes, 2022. "The Key to Sustainable Economic Development: A Triple Bottom Line Approach," Resources, MDPI, vol. 11(5), pages 1-18, May.
    12. Sajida Sari & Shochrul Rohmatul Ajija & Wasiaturrahma Wasiaturrahma & Raja Adzrin Raja Ahmad, 2022. "The Efficiency of Indonesian Commercial Banks: Does the Banking Industry Competition Matter?," Sustainability, MDPI, vol. 14(17), pages 1-16, September.
    13. Thi My Phan, Hanh & Daly, Kevin & Akhter, Selim, 2016. "Bank efficiency in emerging Asian countries," Research in International Business and Finance, Elsevier, vol. 38(C), pages 517-530.
    14. Zhang, Xiaoming & Wei, Chunyan & Lee, Chien-Chiang & Tian, Yiming, 2023. "Systemic risk of Chinese financial institutions and asset price bubbles," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    15. Elena G. Shershneva, 2024. "CAMELS parameters’ impact on the risk of losing financial stability: The case of Russian banks," Journal of New Economy, Ural State University of Economics, vol. 25(2), pages 130-152, July.
    16. Kumar Debasis Dutta & Mallika Saha, 2021. "Do competition and efficiency lead to bank stability? Evidence from Bangladesh," Future Business Journal, Springer, vol. 7(1), pages 1-12, December.
    17. Biswa Swarup Misra & Paolo Coccorese, 2022. "Market power, efficiency and stability of Indian banks," Economic Change and Restructuring, Springer, vol. 55(4), pages 2263-2292, November.
    18. Facundo Costa de Arguibel & Juan Antonio Dip & Gerardo Stvass, 2024. "Unravelling the Determinants of Banking Efficiency in Argentina: a two-stage Analysis of the Argentine Banking Sector," Working Papers 326, Red Nacional de Investigadores en Economía (RedNIE).
    19. Abayomi Oredegbe, 2022. "Competition and Banking Industry Stability: How Do BRICS and G7 Compare?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 21(1), pages 7-31, March.
    20. Tan, Yong & Floros, Christos, 2018. "Risk, competition and efficiency in banking: Evidence from China," Global Finance Journal, Elsevier, vol. 35(C), pages 223-236.
    21. Jayakumar, Manju & Pradhan, Rudra P. & Dash, Saurav & Maradana, Rana P. & Gaurav, Kunal, 2018. "Banking competition, banking stability, and economic growth: Are feedback effects at work?," Journal of Economics and Business, Elsevier, vol. 96(C), pages 15-41.
    22. Cristian Barra & Anna Papaccio & Nazzareno Ruggiero, 2023. "Basel accords and banking inefficiency: Evidence from the Italian local market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4079-4119, October.
    23. Dwumfour, Richard Adjei, 2017. "Explaining banking stability in Sub-Saharan Africa," Research in International Business and Finance, Elsevier, vol. 41(C), pages 260-279.
    24. Sergio Luis Náñez Alonso & Javier Jorge-Vázquez & Miguel Ángel Echarte Fernández & David Sanz-Bas, 2024. "Bitcoin’s bubbly behaviors: does it resemble other financial bubbles of the past?," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    25. Carvallo, Oscar & Kasman, Adnan & Kontbay-Busun, Sine, 2015. "The Latin American bank capital buffers and business cycle: Are they pro-cyclical?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 148-160.

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