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1 ISSN Working Paer Serie eman for Bank Service an arke Power in Braziian Banking árcio I. Nakane, eonaro S. Aencar an Fabio Kanczuk June, 2006

2 ISSN CGC / Working Paer Serie Braíia n. 07 un 2006 P. -46

3 Working Paer Serie Eie by Reearch earmen (ee) E-mai: Eior: Benamin irana abak E-mai: Eioria Aien: Jane Sofia oia E-mai: Hea of Reearch earmen: Caro Hamion Vaconceo Araúo E-mai: he Banco Cenra o Brai Working Paer are a evauae in oube bin referee roce. Reroucion i ermie ony if ource i ae a foow: Working Paer n. 07. Auhorize by Afono San'Anna Beviaqua, euy Governor of Economic Poicy. Genera Conro of Pubicaion Banco Cenra o Brai Secre/Sure/ime SBS Quara 3 Boco B Eifício-See Caixa Poa Braíia F Brazi Phone: (556) an Fax: (556) E-mai: he view exree in hi work are hoe of he auhor an o no neceariy refec hoe of he Banco Cenra or i member. Ahough hee Working Paer ofen rereen reiminary work, ciaion of ource i require when ue or rerouce. A oiniõe exrea nee rabaho ão excuivamene o() auor(e) e não refeem, neceariamene, a vião o Banco Cenra o Brai. Aina que ee arigo rereene rabaho reiminar, ciação a fone é requeria memo quano rerouzio arciamene. Conumer Comain an Pubic Enquirie Cener Are: Secre/Sure/iae Eifício-See 2º uboo SBS Quara 3 Zona Cenra Braíia F Brazi Fax: (556) Inerne: h://www.bcb.gov.br/?engih

4 eman for Bank Service an arke Power in Braziian Banking * árcio I. Nakane ** eonaro S. Aencar *** Fabio Kanczuk **** Abrac he Working Paer hou no be reore a rereening he view of he Banco Cenra o Brai. he view exree in he aer are hoe of he auhor() an o no neceariy refec hoe of he Banco Cenra. We ue bank-eve aa o moe he eman for bank ervice in Brazi foowing he icree choice ieraure. A muinomia ogi ecificaion i ue o uy he eman for ime eoi, for an aggregae of eman an abook aving eoi, an for oan. arke for each of hee rouc i efine a he municiaiy eve. In he uy ie, we fin he aboue rice-co margin conien wih Berran comeiion an wih care. Our reu ugge ha even Berran comeiion overeimae he egree of marke ower in he Braziian banking inury. Keywor: eman for bank ervice, bank comeiion, Braziian banking JE Caificaion: G2, 3 * hi aer wa eveoe for he roec Suie in quaniaive meho aie o aniru an economic reguaion onore by SE-J uner he echnica coorinaion of IPEA (conrac 0/2004- SE/ANPEC). he auhor hank, wihou imicaing, Euaro Fiúza, Joé Guavo Fere, João anoe Pinho e eo, Abero Savo, Pauo Furquim e Azeveo, Akimar oura, Juiano Aunção, Waer Novae, Bernaro Bum, Aeanro Oiveira, Ocar Herrera, Joé Ávaro Rorigue Neo, aria Euara annuri-piano a we a eminar arician a Cenra Bank of Brazi, FGV-SP, PUC-RJ, SE/Iea/Anec, Necar/IA, Cema an SBE for uefu commen an uggeion. he Cenra Bank of Brazi efin uni mae avaiabe mo of he aa ue in he aer. Remaining error are our own reonibiiy. ** Reearch earmen, Cenra Bank of Brazi, an Economic earmen, Univeriy of São Pauo. E- mai: *** Reearch earmen, Cenra Bank of Brazi. E-mai: **** Economic earmen, Univeriy of São Pauo. E-mai: 3

5 . Inroucion he egree of comeiion in he banking inury in Brazi i a ubec of ome conrovery. High bank inere margin coue wih rofi inicaor for he main bank in he counry reinforce he ouar view ha bank oerae uner imerfec marke. he emirica ieraure ha rigorouy ee for he reence of marke ower inee foun ome evience o reec he view ha he Braziian banking ecor oerae uner erfec comeiion. On he oher han, he hyohei ha Braziian bank oerae uner care i ao reece. Nakane (2003) urvey he avaiabe ieraure. However, he reaion beween he ricing of bank rouc an he evenua exercie of marke ower eem o be i argey unknown in he counry. he main aim of hi aer i o fi hi ga an imrove uon he avaiabe ieraure. Anoher fie where he emirica knowege i amo non-exien i he magniue of he eman eaiciie for he bank rouc in Brazi. hi aer eveo a icree choice moe of eman for bank rouc, an rovie reiminary eimae of eman eaiciie for ome rouc. he reevan marke for bank rouc in he geograhica imenion i aume o be oca. Each municiaiy efine a reevan marke. By conra, he reevan marke in he reviou uie wa aume o be he whoe counry. Such uie may herefore be biae owar fining more comeiion han he acua eve. By aoing a more rerice geograhica imenion, we inen o ecreae uch bia. On he uy ie, wo moe of bank behavior are eveoe in he aer. he fir foow a Berran-Nah comeiion behavior an he econ a care behavior. Imie rice-co margin are erive for each moe. Eimae of hee can be obaine by uing avaiabe aa an he eimae eman arameer. 4

6 In he reen arice, we e marke ower by comaring he oberve rice-co margin wih he one reice by he Berran an care moe. he reu how ha he Berran moe i a goo ecriion of he ervice fee charge by Braziian bank on eoi, bu overeimae he marke ower on he eing of oan an ime eoi inere rae. he arice i organize a foow. Secion 2 ecribe he eman moe. Secion 3 reen he uy moe. In ecion 4, we ecribe he aa an he inrumen. eman eimaion reu are reene in ecion 5 an he imuaion reu in ecion 6. Finay, ecion 7 concue. 2. he eman moe he moe ecribe here foow ick (2002), which moifie he icree choice framework o fi he eman for banking ervice. ick rerice her anayi o he eoi ervice. In aiion o eoi, we ao ue he moe o ecify he eman for oan. he eman moe ha he foowing forma rucure: Aume he exience of a conumer i ha chooe he eoi ervice of a bank in a marke (,...,). e 0,,...,J, inicae he bank comeing in marke, where 0 rereen he ouie oion, i.e. he oion for he houeho no o chooe any of he bank. he coniiona inirec uiiy of conumer i from chooing bank i: u i ε () v v α α + x β + ξ + i where rereen he inere rae ai on ime eoi, v i he ervice fee on banking ervice, x i a K-imeniona row vecor of obervabe rouc characeriic, ξ rereen unoberve rouc characeriic, an ε i i mean zero ochaic erm wih an i.i.. exreme vaue ye I iribuion. he K+2 imeniona v vecor θ ( α, α, β ) rereen he eoi ervice eman arameer. See Nakane (2002), Beaich (2003), an Peerini an Jorge Neo (2003). 5

7 Suoe ha each conumer chooe one uni of ervice from he bank ha maximize her uiiy. hi imiciy efine he e of unobervabe variabe ha reu in he choice of ervice from bank. Formay, e hi e be: {( ν, ).q. u u 0,,...,J} v A ( x.,.,., ξ. ; θ ) i εi i i (2) where v v v x. ( x,..., xj )',. (,..., J )',. (,...,J )', ξ. ( ξ,..., ξ J )', an ν i rereen he unobervabe characeriic of conumer i. hu, auming ie occur wih zero robabiiy, he marke hare of rouc i given by he robabiiy ha ν, ε ) beong o he A region, for a houeho. Formay, ( i i hi marke hare i given by: ( x,.., v., ξ. ; θ ) P* ( ν, ε ) P* ( ν )P* ( ε ) (3) A A where P*(.) rereen ouaion iribuion funcion. Noice ha hi moe oe no incue any ineracion beween he unobervabe characeriic of iniviua i, ν i, an he obervabe characeriic of rouc. hi mean ha he moe beong o he ca of anar icree choice moe known a muinomia ogi moe. hi aow u o fin a coe form ouion for (3), given by: v v ex( α α + x β + ξ ) v v + ex( α α + xk β + ξ k k k ) J k (4) In ie of i anayic imiciy, he imiaion of he ogi ecificaion are we known [ee, among oher, Berry (994), Berry, evinohn an Pake (995) an Nevo (2000)]. In aricuar, he rice eaiciie generae by he ogi moe een ony on marke hare, generaing quie rericive ubiuion aern. icree choice moe 6

8 wih ranom coefficien inrouce ineracion erm beween he iniviua characeriic an obervabe characeriic of he rouc, generaing more reaonabe ubiuion aern [ee Berry (994), Berry, evinohn an Pake (995, 2004) an Nevo (200)]. he co of hi oion i i comuaiona comexiy, becaue, in hi a cae, exreion (3) canno be anayicay ove. v v e δ α α + x β + ξ be he mean uiiy of rouc, which i he ame for a conumer, an e δ δ,..., δ ). If S rereen he marke hare of bank ( J acuay oberve, hen, he foowing e of equaion mu ho a he rue vaue of δ : S ( δ),,..., J (5) where he erm on he righ han ie of (5) i given by exreion (4), an i rereen he marke hare reice by he moe. Subiuing exreion (4) in (5), an normaizing he mean uiiy of he ouie goo o zero, we obain he eoi ervice eman equaion: n( S ) n( S ) ξ (6) 0 v v α α + x β + Noice ha he unobervabe characeriic of rouc wi be caure by he regreion error in (6). Given he correaion beween uch comonen an rice, he economeric eimaion mu foow inrumena variabe echnique. he ecificaion of he oan eman i enirey imiar. I i uoe, in he oan cae, ha he inere rae coece on oan ubiue he rice ha aear in (6). 3. he uy ie: wo moe of bank behavior e be a bank ha oerae a ifferen marke. A each of hee marke, hi bank ea wih he foowing rouc: eman eoi (), aving eoi (S), ime eoi (), oan (), bon (B), an banking ervice (SV). 7

9 Each bank foow rice comeiion a a Berran. 2 he raegic variabe for each bank are he foowing hree rice: oan inere rae ( ( ), an ervice fee ( v ), ime eoi inere rae ). Suoe ha here i no rice icriminaion among he variou marke, o ha he rice i he ame a each marke:,,...,. v v, e In aiion o hee rice, here are wo oher rice ha are exogenou o he bank: he bon inere rae (r) an he aving inere rae (r ). We ao aume ha he inere rae on eman eoi i equa o zero. Bank baance hee conrain i given by: B + + ρ + + S (7) where ρ rereen reerve requiremen on eman eoi. Aume ha here are no reerve requiremen on ime eoi an on aving or, aernaivey, ha, if hey exi, hey are ai a he rae r, which neuraize heir effec on bank. Aume ao ha bank o no have equiy a a funing ource, which i no a rericive aumion for he Braziian cae. We efine an eimae eman moe for oan, ime eoi an he aggregae of eman an aving eoi ( + S ). he foowing ieniie are vai for hee rouc: V V V (8) 2 We aume he exience of a ure raegy inerior equiibrium an ricy oiive inere rae a he equiibrium. 8

10 where i he oan voume of bank a marke, i he ime eoi voume of bank a marke, i he aggregae voume of eman eoi an aving of bank a marke, V i he mean vaue of he banking ecor ening oeraion, V i he mean vaue of he banking ecor ime eoi, V i he mean vaue of he banking ecor eman an aving eoi, i he ize of marke, i he marke hare of bank in marke in erm of oan, i he marke hare of bank in marke in erm of ime eoi, an aggregae of eman an aving eoi. i he marke hare of bank in marke in erm of he he eman moe eveoe in he aer ue a ogi ecificaion ha ha he foowing rucure: n( n( n( ) n( ) n( ) n( 0 0 ) α 0 ) α 2 ) α 4 v + oher var iabe α 3 α 5 v + oher var iabe + oher var iabe (9) where i he marke hare of he ouie goo in marke in erm of oan, i 0 0 he marke hare of he ouie goo in marke in erm of ime eoi, 0 i he marke hare of he ouie goo in marke in erm of he aggregae of eman an aving eoi, an α an α 5 are he (oiive) rice coefficien. he ouion of he bank oimizaion robem, uner Berran comeiion, require he knowege of he foowing aria erivaive: 9

11 v v α ( α 2 α α 4 α 3 5 ( ( ( ( ) ) ) ) ) (0) he ouion of he bank oimizaion robem, uner a care rucure, wi ao nee he cro aria erivaive. So, for wo iinc bank an k, we obain from (9): k k v k v k k α α k α α α 2 k 3 k 4 k 5 k () he rofi of bank can be exree a: v Π rb + + SV r S C(,, ) (2) where C (.) rereen he oeraiona co of he bank. Subiuing he baance hee conrain (7) in (2), an auming ha he fow of ervice SV i rooriona o he voume of eoi (wih he roorionaiy coefficien normaize o one, wihou o of generaiy), he foowing exreion for bank rofi i obaine: 0

12 v Π r ) + ( r ) + ( r + -θ ) C(,, ) (3) ( where: θ r + r ρ S We oberve ha he aria erivaive of he foowing fir orer coniion. θ wih reec o rice wi be omie in 3. Berran comeiion Bank chooe he rice, an v o a o maximize i rofi funcion (3). In he fir marke rucure (Berran comeiion), hi bank aume ha he rice of i riva wi be ke conan. he fir orer coniion wih reec o i given by: + ( r c ) V 0 (4) where c C i he margina co o rovie one uni of oan. Subiuing (0) in (4) an rearranging he erm, we obain: r c α V ( ) (5) Noice ha he righ ie of (5) i obervabe. hi mean ha exreion (5) can be ue o erive he aboue rice-co margin of bank reae o i oan aciviie ha i comaibe wih he moe eveoe here. oreover, if here i informaion abou c,

13 he ef ie of (5) i ao obervabe an, a a conequence, hi exreion can be ue o examine he egree of comaibiiy of he aa wih he moe. Afer ubiuing exreion (0), fir orer coniion i given by: v ( r c ) α 2V ( ) ( r + θ c ) α 5V ( ) (6) where c C i he margina co o rovie one uni of ime eoi an c C i he margina co o rovie one uni of eman or aving eoi. Simiary, he fir orer coniion wih reec o v i given by: v ( r c ) α 3V ( ) + ( r + θ c ) α 4V ( ) (7) We can ove (6) an (7), o a o fin he aboue rice-co margin for boh rice: r c ( α α 2 4 α + α α )V α 5 ( ) (8) r α 2 α 3 θ c (9) ( α α + α α )V ( ) v Simiary, he righ ie of (8) an (9) are obervabe. A a conequence, we can ue hee exreion o obain he aboue rice-co margin reice by he moe for 2

14 ime eoi an bank ervice or, if we know he margina co c an he auibiiy of he rooe moe wih reec o he avaiabe aa. c, o check From (5) an (8) i i oibe o obain he inere rae rea ha i comaibe wih he moe. hi rea i efine by he ifference beween he oan inere rae an he ime eoi inere rae: c + c + α V ( ) ( α 2α 4 + α 3α 5 + α 4 )V + α 5 ( ) (20) 3.2 he care ouion he e of marke ower rooe here comare he Berran aocaion o he care one. o ove he oimizaion robem uner he care marke rucure, aume ha he monooi chooe he rice o a o maximize he um of he rofi of each bank, where he rofi of each of hee bank i given by an exreion uch a (3). he fir orer coniion wih reec o he oan inere rae of bank,, i given by: J k + ( r c ) V + ( k r ck ) V 0 (2) k Noice ha he fir wo erm on he ef ie of (2) are ienica o he erm for he Berran oigooi. he hir erm ake ino accoun he imac of he change of bank rice on he oan eman of oher bank. here are J fir orer coniion ha are equivaen o (2). hee coniion mu be ove imuaneouy o a o fin he aboue rice-co margin reice by he care moe. Subiuing he aria erivaive (0)-() ino (2), i i oibe o anayicay fin hee margin. o o o, efine he foowing marice: 3

15 4 ( ) J J c - r c - r c r, J, an J J 2 J J J J 2 ) ( ) ( ) ( he aboue rice-co margin of oan ha are conien wih he care moe are given by: ( ) V c r α (22) We can foow a imiar roceure for he oher wo ervice. A he care ouion, he fir orer coniion wih reec o ime eoi for a J bank can be exree a: ( ) ( ) ( ) ( ) c r V c r V v Θ α α (23) where: ( ) J J c - r c - - r c r, ( ) J J v J v v c - r c - r c r θ θ Θ, J, J J 2 J J J J 2 2 ) ( ) ( ) (, an

16 5 J J 2 J J J J 2 3 ) ( ) ( ) ( Simiary, he fir orer coniion wih reec o he rice of ervice for a J bank can be wrien a: ( ) ( ) ( ) ( ) c r V c r V v Θ α α (24) where: J Soving (23) an (24) imuaneouy, he aboue rice-co margin for ime eoi an ervice can be foun o be: ( ) [ ] )V ( c r α α α α α α (25) ( ) [ ] )V ( c r v α α α α α α Θ (26) Finay, from (22) an (25) we have he bank rea ha i conien wih he care ouion:

17 4. aa ( ) c + c + + [ α + α ] α V ( α 2α 4 + α 3α 5 )V (27) he moe i eimae for a ane of bank oeraing in Brazi in ecember 2002 an in ecember A commercia bank an a univera bank wih oan orfoio are incue in he ame, for a oa of 34 bank. 4. arke efiniion he marke efiniion wi ake ino accoun boh he rouc an geograhic imenion. From he rouc imenion erecive, earae eimaion for hree cae of rouc wi be reene: he um of eman an aving eoi, ime eoi, an oan. For each rouc, he geograhic imenion wi be eineae a a municiaiy. he efiniion of municiaiy foow he one ue by IBGE (he officia Braziian iniue for geograhica aiic). he ame incue he 3,252 municiaiie where a ea one bank wa oeraing on he bae ae. For he ifferen rouc we have 3,242 marke for he eman eoi an aving, 2,78 for ime eoi, an 3,242 for oan. 4.2 arke hare o eimae equaion (6), we nee he marke hare of each bank an of he ouie goo. hi aer foow he roceure rooe by ick (2002), auming ha he conumer icree choice refer o one uni of average eoi accoun. hi average accoun i cacuae a he oa voume of each kin of eoi ivie by he number of banking accoun acro a bank in a given year. he iviion of he voume of a bank ecific eoi by he average eoi accoun give he number of accoun ha i rouce by a bank in a ecific marke. he marke hare for hi bank wi be he number of accoun i rouce ivie by he ize of he oenia marke. he ize of he oenia marke i efine in erm of he oca ouaion of he marke, which foow Berry, evinohn an Pake (995) an Nevo (200). he marke hare 6

18 of he ouie goo i given by he ifference beween one an he um of he hare of each bank oeraing in hi marke. he ame roceure wa aoe o efine he average banking oan an he marke hare of he ouie goo for he oan cae. aa on eoi an oan voume come from he ESBAN yem of Cenra Bank of Brazi. hi yem ha informaion on he main baance hee accoun for each branch in each municiaiy. o obain he eoi voume he by each bank in each municiaiy, we aggregae he aa on branche. he aa on eoi an oan voume correon o he aggregae of houeho an enerrie voume. he number of accoun for he ifferen kin of eoi i aken from he Funo Garanior e Créio (FGC) reor, rouce by he Cenra Bank of Brazi. he vaue of he average eoi accoun for he um of eman an aving eoi were eimae o be R$, (ecember 2002) an R$,89.24 (ecember 2003). he equivaen vaue for he ime eoi are R$ 37,255.7 (ecember 2002) an R$ 54,047.7 (ecember 2003). he mean vaue of he oan come from SCR, a yem of crei informaion from he Cenra Bank of Brazi. Ony oan oeraion beween R$ 5 houan an R$ 0 miion were coniere. here i no informaion beow he ower boun, an he choice of he uer boun wa an arbirary eciion. he eimae mean vaue of oan in ecember 2003 wa R$ 2, We efae hi vaue by he conumer rice inex IPCA o cacuae he mean vaue of R$ 9,853.3 for he oan in ecember he aa on he municiaiy ouaion were aken from IBGE. We ue he erie cae Pouação Reiene oa for he year of

19 4.3 Price We aume ha ha,, an v v,,...,, becaue he rice, v, an (for he whoe counry). are no oberve a he eve of each marke, bu ony a he bank eve he oan rice come from he rimary informaion ue o rouce he Pre Reeae: Inere an Banking Srea, from he Cenra Bank of Brazi. he ime eoi rice come from he rae reore o he Cenra Bank of Brazi by he financia iniuion. hee rice are aiy aa on he average ree inere rae charge/ai on/o houeho an on/o enerrie, which were hen weigh average by he aiy infow voume, comoune an normaize o a monh of 2 raing ay. he ervice fee were erive from he COSIF yem of he Cenra Bank of Brazi. hi i an accouning reor of he Braziian financia iniuion wih monhy baance hee an income aemen. he accoun for ecember 2002 an ecember 2003 were ue in he uy. Service fee were cacuae a he raio of income from ervice o he voume of eoi. Such rice refec ix monh of revenue. We herefore ivie hi rice by ix o obain a monhy equivaen meaure. o obain θ ha aear in (3), we ao nee o meaure he rice of aving eoi. hi rice i obaine a he raio of he co of aving eoi o he voume of aving eoi. A for ervice fee, hi rice wa ivie by ix. Finay, he rice of bon i equa o he Seic baic inere rae. 4.4 Obervabe characeriic he oberve characeriic of a bank incue hree ye of variabe, namey: a) variabe ha are obervabe a each marke, ha i for each bank for each municiaiy; b) variabe ha are ony obervabe a he counry eve; an, c) ineracion erm beween obervabe bank characeriic an oca variabe (municia income er caia). 8

20 he obervabe characeriic of a bank in a marke incue: a) number of bank branche in he municiaiy; b) number of Auomaic eer achine (A) in he municiaiy; c) branch eniy in he municiaiy efine a he raio of he number of bank branche in he municiaiy o he area of he municiaiy; ) A eniy in he municiaiy efine a he raio of he number of A in he municiaiy o he area of he municiaiy. he obervabe bank characeriic of a bank ha how no variaion acro he ifferen marke incue: a) number of bank branche in he counry; b) number of A in he counry; c) number of ae where he bank oerae; ) bank age; e) number of bank emoyee; ) average number of bank emoyee er branch; e) averiemen co. aa on he number of branche, number of A, number of emoyee, bank age, an averiemen co come from he Cenra Bank of Brazi. unicia income i municia GP a conan vaue of 2000 avaiabe from SIRA-IBGE. he ame ource give he area for each municiaiy. In aiion o he bank characeriic, oher conro variabe for he municiaiie were ao incue in he regreion. hee aiiona conro variabe incue he GP, GP er caia, area, an he ouaion eniy for each municiaiy. 4.5 Inrumen he fir e of inrumen ue in he aer incue bank co hifer. he foowing variabe are incue in hi grou: a) eronne co; b) oeraiona co; c) crei rik, meaure a he raio of (ne) roviioning for non-erforming oan o he voume of oan; ) iquiiy, meaure a he raio of iqui o oeraiona ae; e) raio of ne worh o oeraiona ae; f) raio of oan o oeraiona ae (hi inrumen wa ony ue in he eman equaion for eoi). he informaion for he conrucion of a he above-menione inrumen come from he COSIF yem of he Cenra Bank of Brazi. 9

21 In aiion o co hifer, we ao emoye a e of inrumen uggee by Berry, evinohn an Pake (995), which incue he bank characeriic of he riva in each marke (henceforh cae BP inrumen). he i of BP inrumen ue in he aer incue he um of he foowing variabe for he riva in each mark: a) number of branche in he municiaiy; b) number of branche in he counry; c) number of A in he municiaiy; ) number of A in he counry; e) eniy of branche in he municiaiy; f) eniy of A in he municiaiy; g) age; h) averiemen co. 5. eman eimaion reu We now reen he eimae for he eman for bank rouc. he reu are earaey reene for each of he hree bank rouc coniere in he aer, namey: ime eoi, eman u aving eoi, an oan. Four ifferen moe were eimae for each rouc by combining ifferen e of inrumen (co hifer or co hifer u BP) an he incuion (or no) of ineracion erm beween bank characeriic an er caia income. A eimae regreion incue a ime ummy (equa o one for 2002) o conro for macroeconomic facor. Heeroceaic robu anar error are reore. he overienificaion e i robu o he reence of heeroceaiciy, foowing he roceure uggee by Woorige (2002,. 23) 3. abe how he rice coefficien for he eman for ime eoi. Beow he vaue for each eimae coefficien we reor he eimae anar error for he coefficien (ef) an he aociae aiic (righ). 3 he e -vaue i reore beween arenhee. 20

22 abe : Reu for ime eoi eman VARIABE OE OE 2 OE 3 OE 4 ime eoi rice Service fee (2.70) (24.07) (2.80) (24.2) (-7.) (-9.0) 0.32 (-7.22) (-9.09) Income er caia ineracion? No Ye No Ye Inrumen Co Co Co + BP Co + BP Overienificaion e (0.0) (0.0) (0.0) (0.0) Fir age aue R2 (ime eoi rice) Fir age aue R2 (ervice fee) Fir age F e (ime eoi rice) Fir age F e (ervice fee) Obervaion One can oberve ha, a exece, he rice for eman eoi ha a oiive imac over i own eman whie he ervice fee ha a negaive effec on he eman for ime eoi. A he moe hare hi feaure an he coefficien are away highy ignifican. oreover, he eimae coefficien o no greay iffer among he ifferen ecificaion, being reaonaby robu. abe 2 bring he reu for he eman for he aggregae of eman an aving eoi. 2

23 abe 2: Reu for he eman of he Sum of eman an Saving eoi VARIABE OE OE 2 OE 3 OE 4 ime eoi rice Service fee (-7.9) (-7.4) 0.97 (-6.22) 0.97 (-5.70) (-5.78) 0.09 (-7.99) 0.05 (-5.8) 0.09 (-8.03) Income er caia ineracion? No Ye No Ye Inrumen Co Co Co + BP Co + BP Overienificaion e (0.0) (0.0) (0.0) (0.0) Fir age aue R2 (ime eoi rice) Fir age aue R2 (ervice fee) Fir age F e (ime eoi rice) Fir age F e (ervice fee) Obervaion he eimae rice coefficien are, a exece, negaive in every ecificaion. hey are ao highy ignifican. here i a igh ifference among he moe, hough. he rice coefficien for ime eoi are higher (in aboue vaue) when ony co hifer are ue a inrumen (moe an 2). For he coefficien on ervice fee, he greae aboue vaue were foun for he moe when ineracion wih income er caia are incue (moe 2 an 4). abe 3 reor he reu for he eman for oan. For hi rouc, we make he aumion ha ony he rice of oan affec i eman. 22

24 abe 3: Reu for oan eman oan rice VARIABE OE OE 2 OE 3 OE (-5.28) 0.08 (-2.64) 0.09 (-2.77) 0.08 (-8.55) Income er caia ineracion? No Ye No Ye Inrumen Co Co Co + BP Co + BP Overienificaion e (0.0) (0.0) (0.0) (0.0) Fir age aue R2 (oan rice) Fir age F e (oan rice) Obervaion he rice coefficien are negaive an highy ignifican in a he moe. Neverhee, here are ome ma variaion among he moe he (aboue) vaue for he coefficien are higher for he moe incuing ony co hifer a inrumen (moe again 3, an moe 2 again 4) a we a for he moe incuing ineracion wih income er caia (moe 2 again, an moe 4 again 3). A he eimae moe reec he nu hyohei of he overienificaion e. I i no cear, however, wheher hi reecion i ue o oor inrumen or ue o he high number of obervaion in each regreion. he aiic for he overineficaion e i rooriona o he number of obervaion. he aiica ignificance for he F e in he fir age regreion ugge ha here i ome exanaory ower for he inrumen. One can obain he rice eaiciie for each bank in he ame from he eimae rice coefficien 4. abe 4 an 5 how he reu for 2002 an 2003, reecivey. he reu are reore for boh he meian bank a we a for he weighe mean (weighe by he marke hare of each bank). 4 I i ao oibe o comue he cro rice eaiciie for each air of bank in he ame. Such eaiciie are no reore in he aer, hough. 23

25 abe 4: Price Eaiciy (2002) ime eoi Price Service Fee oan Price PROUC eian ean eian ean eian ean IE EPOSIS oe oe oe oe EAN AN SAVING EP. oe oe oe oe OANS oe oe oe oe abe 5: Price Eaiciy (2003) ime eoi Price Service Fee oan Price PROUC eian ean eian ean eian ean IE EPOSIS oe oe oe oe EAN AN SAVING EP. oe oe oe oe OANS oe oe oe oe

26 he reu how ha he own rice eaiciie are very high for ime eoi, being in he range from 2.0 o 23.6 in 2002 an from 5.5 o 6.0 in he own rice eaiciie for he oan eman a we a he eaiciy for he eman of eman an aving eoi wih reec o he rice of ime eoi are more moe in ize. Finay, he eman for boh ye of eoi were foun o be ineaic wih reec o ervice fee 5. Such eimae vaue for he rice eaiciie can be coniere a reaonabe? he ack of oher imiar uie for Brazi make i har o anwer hi queion. ick (2002) reor ome rice eaiciie for he eman for overa eoi for he U.S. marke ao uing he muinomia ogi funciona form. She foun meian rice eaiciie of for ervice fee an of for eoi rae. ick oe no eimae earae eman for ifferen ye of eoi. One can hen conecure ha he eaiciie he foun hou be in he inermeiary range of he eaiciie we foun for each ye of eoi. hi i reciey wha haen an we, herefore, concue ha he eaiciie reore in abe 4 an 5 are no in confic wih he avaiabe ieraure. In aricuar, ick (2002) ao foun ineaic eman wih reec o ervice fee. abe 6 reene he ign for he eimae coefficien for he oher exanaory variabe incue in he eman regreion 6. he meaning of each variabe i ecribe in he aenix. he incuion of ifferen e of inrumen o no change he ing of any coefficien. We herefore groue he reu of moe an 3, a we a he reu of moe 2 an 4. When he ignificance eve change beween he groue moe, he abe reor he one wih he owe ignificance. 5 Ineaic eman o no imy ha he econ orer coniion for he rofi maximizaion robem are vioae. he fir orer coniion (6) an (7) make cear ha boh he eman for ime eoi a we a he eman for he um of eman an aving eoi mu be aken ino accoun for he eerminaion of ervice fee. We comue he econ orer coniion from exreion (4), (6) an (7) an oberve ha hey ho for every obervaion in he ame (no reore in he aer). 6 he eimae vaue for he coefficien are no reore here, bu hey are avaiabe uon reque. 25

27 abe 6: Reu for he Oher Exanaory Variabe IE EPOSIS EAN EP.+SAVINGS OANS VARIABE o. an 3 o.2 an 4 o. an 3 o.2 an 4 o. an 3 o.2 an 4 branchmun +*** +*** +*** + +*** - branchbr +*** +*** +*** +*** +*** +*** ammun -*** *** +** ambr +*** +* -*** -*** -*** -*** ae -*** -*** - +*** -*** -*** enbranch +*** +*** +*** +*** +*** +*** enam *** -*** -*** averiing +*** +*** +* - -*** -** age +*** - +*** +*** +*** +*** embranch +*** +*** - -*** gmun -*** -*** -*** -*** -* - gcaia +*** -*** +*** +*** +*** - gcaiaq -*** -*** -*** -*** -*** -*** area -*** -*** -*** -*** -*** -*** eniy -*** -*** -*** -*** -*** -*** branchmungca -* +** +** branchbrgbca - +*** -*** ammungca -* - -*** ambrgca - -*** +*** aegca +*** -*** +** enbrangca - -*** -*** enamgca - +** + avergca -** + - agegca +*** - +** embrangca +** +*** Noe: (*) ignifican a 0%, (**) ignifican a 5%, (***) ignifican a %. he Aenix reen he meaning of each of hee variabe. he reu reore in abe 6 inicae ha he number of bank branche in he municiaiy an in he counry a we a he branch eniy have oiive imac on he bank eman. hu, uch aribue are vaue by he agen. Anoher reu i ha bank age ha a oiive effec on i eman, which may inicae ome reuaion effec. Wih regar o he oher bank characeriic, he effec are iinc for he ifferen bank rouc. Some of he coefficien are no robu o ifferen moe ecificaion wherea ome oher have ign ha are ooie of he exece. 26

28 Wih reec o he municiaiy characeriic, he reu inicae ha he eman for bank rouc are higher for municiaiie wih greaer GP, GP er caia, area, an ouaiona eniy. he eimae rice coefficien reore in abe o 3 wi be ue in he imuaion erforme in he nex ecion. 6. e of marke ower In hi ecion we wi ake he exreion erive in ecion 4 ogeher wih he rice coefficien eimae in ecion 5 o erform a e of marke ower for Braziian banking. For each of he eimae moe, we comue he aboue rice-co margin conien wih Berran an wih he care moe for each bank in he ame. Such margin are cacuae form he exreion on he righ ie of (5), (8) an (9) for Berran, an of (22), (25) an (26) for couion. abe 7 an 8 reor he reu for boh he meian bank an for he weighe (by he voume of he reecive rouc) mean. he abe ao how he oberve rice-co margin, a given by he ef ie of he reecive exreion menione in he reviou aragrah. One hou noice ha he oberve vaue are no affece by he eman coefficien an herefore hee vaue are invarian o he iinc eman moe. However, he oberve margin require he avaiabiiy of he reecive margina co. abe 7 an 8 reor he oberve margin for wo eimae for hee margina co. he fir e of reu aume ha uch margina co are zero. A econ e of reu i ao reore wih eimae of margina co being obaine from FIPECAFI (2004). FIPECAFI (2004) ue reource aocaion informaion from a ame of nine Braziian commercia bank o ecomoe oeraiona co ino hree ifferen aciviie: bank crei, orfoio managemen, an bank ervice. eoi raiing aciviie are no earaey coniere an we herefore have o make ome aumion o infer he co 27

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