International Journal of Emerging Markets Bank market concentration and interest spreads: South Asian evidence

Access to this document was granted through an Emerald subscription provided by emerald-srm:434496 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Abstract Purpose – The purpose of this paper is to investigate whether any deviations in South Asian banks' interest margins can be attributed to market concentration (MC) after controlling for other bank-specific factors and exogenous environmental influences. Design/methodology/approach – The paper employs an improved structural price-concentration model with multiple definitions of market share (MS) covering loan and deposit markets. This model is estimated using generalized least squares method and random effect estimates are reported. The sample consists of 120 South Asian banks with a total of 1,226 bank-year observations over 1992-2005. Findings – The findings suggest that no significant deviations in bank interest margins can be attributed to MC. Instead, only dominant South Asian banks with larger MSs are found to extract higher interest margins. Research limitations/implications – This paper suffers from three main limitations: first, due to data limitations the sample only consists of South Asian domestic commercial banks. Second, due to the lack of product-specific interest rates the authors have to contend with approximated bank-specific interest margins. Third, throughout the study, annual bank-specific data are used due to lack of high-frequency data. Practical implications – The regulators should closely monitor dominant banks with larger loan and deposit shares because these institutions operate with higher interest margins. Similarly, state-owned banks (with relatively inefficient cost structures) should also draw regulatory attention for they extract higher interest margins, possibly, for survival. Originality/value – The existing literature is extended by utilizing a pooled cross-section and time series data model which controls for sample heterogeneity using proxies for cost structures, risk profiles and regulatory restrictions.