Competition and Market Power in the Romanian Banking Sector

• Main Authors: Bogdan Căpraru, Nicoleta-Livia Pintilie
• Format: Article
• Language: English
• Published: Danubius University 2017-04-01
• Series: Acta Universitatis Danubius: Oeconomica
• Subjects: bank competition; adjusted-Lerner index; financial regulation; Boone indicator
• Online Access: http://journals.univ-danubius.ro/index.php/oeconomica/article/view/4060/3960

The current paper analyses the competition degree among Romanian banks during 2005- 2015. We determine the bank-level competition for loans and deposits using efficiency-adjusted Lerner index, while Boone indicator shows how competitive these two markets are. Marginal costs (MC) are estimated with a Fourier flexible form cost function with two bank products, that generate the largest portion of revenues, (i.e. loans and deposits) and three input prices (i.e. labour, funds and physical capital). We use DFA for efficiency-improved Lerner index and Generalized Method of Moments with one-, two- or three-year lagged values of marginal costs as instrumental variables for Boone indicator. The results are compared to the values of HHI and C5, provided by European Central Bank. Overall, bank competition in Romania improves as a direct result of decreasing market power and concentration. On the loan market, we can notice that starting with 2014 banks have changed their behaviour by focusing more on optimizing their portfolios through a complex process of balance sheet cleaning, instead of acquiring additional market share and be more competitive.