MNB WORKING PAPERS. A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary 2007/1 JÓZSEF MOLNÁR MÁRTON NAGY CSILLA HORVÁTH

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1 MNB WORKING PAPERS 2007/1 JÓZSEF MOLNÁR MÁRTON NAGY CSILLA HORVÁTH A Srucura Empirica Anaysis of Reai Banking Compeiion: he Case of Hungary

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3 A Srucura Empirica Anaysis of Reai Banking Compeiion: he Case of Hungary November 2006

4 The MNB Working Paper series incues suies ha are aime o be of ineres o he acaemic communiy, as we as researchers in cenra banks an esewhere. Saring from 9/2005, arices unergo a refereeing process, an heir pubicaion is supervise by an eioria boar. The purpose of pubishing he Working Paper series is o simuae commens an suggesions o he work prepare wihin he Magyar Nemzei Bank. Ciaions shou refer o a Magyar Nemzei Bank Working Paper. The views expresse are hose of he auhors an o no necessariy refec he officia view of he Bank. MNB Working Papers 2007/1 A Srucura Empirica Anaysis of Reai Banking Compeiion: he Case of Hungary* (A banki verseny eemzése a házarási szegmensben) Wrien by: József Monár** Máron Nagy*** Csia Horváh**** Firs version: March 2006 This version: November 2006 Magyar Nemzei Bank Szabaság ér 8 9, H 1850 Buapes hp:// ISSN (onine) * The views expresse in his paper are hose of he auhors an o no necessariy correspon o he views of he Naiona Bank of Hungary (Magyar Nemzei Bank) or of he Bank of Finan. We are graefu o Gábor Kézi, Szabocs Lõrincz, Aisair Mine for vauabe commens an Gábor Káay, Zoán Wof for echnica assisance. We aso hank seminar paricipans a he Magyar Nemzei Bank, he Bank of Finan (Suomen Pankki), Universiy of Mannheim, Hesinki Schoo of Economics an he XV Inernaiona "Tor Vergaa" Conference on Banking an Finance. We are responsibe for a he remainig errors. ** Corresponing auhor: Affiiaion: Research Deparmen, Bank of Finan, P.O.Box 160, FIN Hesinki, Finan.Te.: , e-mai: jomo72@yahoo.com. *** Affiiaion: Magyar Nemzei Bank, H 1850 Buapes, Szabaság ér 8-9, Hungary, Teephone: , Fax: , e-mai: nagymar@mnb.hu. **** Affiiaion: Rabou Universiy Nijmegen - Nijmegen Schoo of Managemen, Thomas van Aquinosraa 3, P.O. Box 9108, NL HK Nijmegen, Neherans, Teephone: , e-mai:c.horvah@fm.ru.n.

5 Conens Absrac 4 1. Inroucion 5 2. The Hungarian banking inusry 7 3. Moe Deman for eposi services an oans Suppy of eposi services an oans Deman esimaion Daa an variabes Resus of eman esimaions Consumer oans Househo eposis Measuring he egree of compeiion Cos funcion Resus: observe an impie price-cos margins Robusness check Concusion 24 References 25 Appenix 26 MNB WORKING PAPERS 2007/1 3

6 Absrac In his paper we anayze he egree of compeiion in he Hungarian househo crei an eposi markes. We esimae iscree-choice, muinomia ogi eposi service an oan eman funcions for each bank an cacuae he corresponing price easiciies. Two moes of he banking inusry are consiere: a saic, iffereniae prouc Nash-Berran oigopoy (as non-cousive benchmark) an a care. Wih esimae margina coss an observe ineres raes we cacuae he price-cos margins an compare hese o he heoreicay impie ones. We fin ha in our sampe perio he compeiion in he Hungarian banking secor is ow, i.e. price-cos margins are high. JEL Cassificaion: G21, L11, L13. Keywors: Deman, iscree choice, prouc iffereniaion, banking, marke power. Összefogaás A anumány a korábbi hazai és nemzeközi iroaomhoz képes egy fejeebb eszközrenszer haszná, az un. iszkré váaszás moejé. Ez a moe eheõsége a arra, hogy a fogyaszói váaszás során moeezzük a ermékifferenciáás meei banki árverseny. Eméei kererenszerben megbecsésre, ieve kiszámíásra kerü, hogy a hipoeikusan a Berran árverseny és ökéees összejászás mee mekkora enne a bankok profimarzsa ( mark-up ), maj ez összehasoníásra kerü a megfigye profimarzsokka. A verseny foka abban az eseben ekineõ aacsonynak, ha a megfigye profimarzs a Berran árverseny és a ökéees összejászás marzsai közö aáhaó. Ha a megfigye profimarzs az eméei Berran pon aá esik, akkor a moe az seei, hogy a verseny foka magas. A anumány ha reai, ieve akossági részpiaco vizsgá, hárma a forinhie (foyószáma, szeméyi és áruvásárási hiepiacoka) és hárma a forinbeéi piacon (ára szóó, rövi fuamiejû és hosszú fuamiejû beéi piacoka). A vizsgához a 2003 január 2005 ecember perióusban havi aaok kerünek fehasznáásra. A megfigye és az eméei moe áa impiká profimarzsok mien egyes bankra, minen egyes hónapban kiszámíásra kerünek. A anumány ez aapján az a kövekezeés vonja e, hogy a verseny foka a foyószáma, áruvásárási és szeméyi hieek, vaamin a ára-szóó és a rövi ejáraú hieek eseén aacsonynak ekinheõ. Egyeü a hosszú ávú beéek eseén azonosíhaó versenyzõi piac. 4 MNB WORKING PAPERS 2006/8

7 1. Inroucion The compeiiveness of he banking secor is an imporan coniion for effecive economic poicy. As he European Commission argue in a receny pubishe repor 1 on reai banking: We funcioning, inegrae an compeiive financia markes are essenia for an efficien an ynamic eveopmen of he European economy. A number of inicaors such as marke fragmenaion an enry barriers as we as a imie choice of reai banking cusomers, however, sugges ha no a financia markes are ruy inegrae. Furhermore hese paerns may sugges ha compeiion may be resrice or isore wihin he common marke, in paricuar wih respec o he provision of reai banking proucs an services o consumers an sma an meium size enerprises. The goa of his paper is o compemen his EU repor s fac fining wih a srucura economic moe of compeiion in he reai banking secor. We bui a srucura moe of compeiion an es our moe on aa from he Hungarian consumer crei an eposi markes. 2 We escribe wo, commony use moes of reai banking compeiion, a cousive care an a iffereniae prouc Nash-Berran compeiion ha we consier as a benchmark for non-cousive pricing. For each suppy moe he pricing ecisions epen on he bank-eve eman. We esimae emans for consumer-oans an eposis using iscree choice, muinomia ogi an nese ogi moes an bank-eve aa. This approach is base on uncovering consumer preferences over iniviua prouc characerisics from he isribuion of he firs choices of consumers (marke shares.) The esimae eman parameers are hen use o cacuae he price-cos margins (PCMs) impie by he wo suppy moes. We esimae a ransog cos funcion for iniviua banks o uncover bank an prouc specific margina coss. The esimae cos parameers an he observe ineres raes are use o cacuae he observe PCMs. Finay, we es which heoreica suppy moe fis he aa beer. In he pas ecaes, empirica economiss eveope severa ifferen echniques o examine he egree of compeiion in oigopoisic inusries. The srucure-conuc-performance (SCP) paraigm conjecures ha in highy concenrae markes, i is easier for ominan firms o coue an raise profis o eves above he compeiive one. Papers using his approach usuay regress profiabiiy on concenraion, which is mosy aken o be exogenous, an frequeny fin a posiive correaion beween marke concenraion an profiabiiy. 3 The probem wih hese suies is ha he causaiy, even if he correaion exiss, is no cear. The more moern echniques circumven he probems of SCP approach an aim o infer he conuc of he firms irecy wihou aking marke srucures ino accoun. The wo mos popuar mehooogies are he Panzar-Rosse (1987) es ha infers conuc from he iniviua firm s inpu-oupu cos reaionships an Bresnahan s (1982) conjecura variaion (CV) moe ha focuses on marke srucure parameers. There are numerous empirica papers ha appie hese mehos o esimae he eve of banking compeiion for ifferen counries. 4 Várhegyi (2004) appies he CV meho o suy he aggregae ening marke in Hungary an fins ha i is fairy compeiive. Móré an Nagy (2004) using he same meho, fin ha he aggregae esimaion cou be miseaing an on he consumers crei an eposi markes banks have significan marke power. The CV approach anayzes marke conuc by esimaing a saic, homogenous goo Courno moe an assumes ha firms maximize profis over oupu eves base on heir expecaions on oher firms reacions. As Cors (1999) shows, he CV mehooogy has severa probems reae o he irraionaiy of conjecure reacions in a saic seing, he inerpreaion of he heoreica conuc parameer an he esimaion mehooogy. The criicism in Cors (1999) pus he resus of CV suies ino perspecive. 5 1 Pubishe on 17 Juy The ciaion is from page In Hungary, he egree of reai bank compeiion aso has been a focus of ebae. The Hungarian Compeiion Commission sare an examinaion of he morgage marke because of he banks high ineres rae, increasing profis an ineres margins we above he EU average inicae ha he pricecompeiion is no sufficien. The inquiry was finishe in January 2006 an no banks were fine bu he repor noneheess conains suggesions abou how banks shou inform consumers, refrain from buning, simpify heir fee srucures, ec. 3 For exampe: Berger an Hannan (1989), Hannan (1997), Hannan an Berger (1991), Berger (1995) repore ower eposi raes, higher oan raes an higher price sickiness in more concenrae markes. 4 Among many ohers see for exampe: De Ban an Davis (2000), Bikker an Haaf (2002), Kraf (2006) for he Panzar an Rosse es an Suominen (1994), Berg an Kim (1998), Neven an Röer (1999), for he Bresnahan moe. For an exensive ieraure review see Degryse an Ongena (2005). 5 See Reiss an Woak (2005) for more eais abou he probems wih he CV approach. MNB WORKING PAPERS 2007/1 5

8 MAGYAR NEMZETI BANK Dick (2002), is he firs paper o appy a srucura, muinomia ogi eman moe 6 on reai eposi services using aa on U.S. commercia banks. Nakane e a. (2006) exen i by suying he marke power on he suppy sie in he Braziian reai banking. This iscree-choice framework avois he above menione probems of earier approaches. I moes he prouc iffereniaion expiciy an heps o overcome he ifficuy of esimaing a arge number of subsiuion parameers given severa banks on he marke. In his moe, one can anayze marke power, consumer preferences an wefare ha are no feasibe uner he oher approaches of he empirica banking ieraure. 7 We exen Dick s moe in hree ways. Firs, we suy ifferen oan an eposi services markes separaey an we aow he poenia marke size o change over ime an across markes. Secon, our efiniions of proucs an markes iffer from Dick (2002). 8 Thir, simiary o Nevo (2001) an Nakane e a. (2006), we aso esimae PCMs uner ifferen suppy-sie assumpions an es which moe fis he aa beer. We exen Nakane e a. (2006) firs, by consiering a nese-ogi specificaion ha aows he consumers ases o be correae across banks (ahough si in a resrice way.) This resus in somewha more reasonabe subsiuion paerns. Secon, unike Nakane e a. (2006), we esimae margina coss wih a ransog cos funcion on accouning aa. Finay, we conuc severa robusness checks. We ry o conro for crei risks an infaion. The resus of our eman esimaes inicae ha in a markes consumers reac o ineres raes an o a esser exen o services fees. They prefer we-saffe an exensive branch sysems. The esimae cos funcion seems o fi he aa we an he esimae margina cos seems o be inuiive. The observe PCMs, cacuae wih observe ineres raes an esimae margina coss, are high in a oans an in he eman eposi sub-markes. As we compare hem o he heoreicay impie PCMs we fin ha on he overraf, higher purchase oan 9, persona oan, eman eposi an shor-run eposi markes mos of he observe PCMs are higher han our non-cousive benchmark. A he same ime he ong erm eposi marke cou be characerize as fairy simiar o or beow he non-cousive benchmark. We perform severa robusness checks an fin ha he resus, oher han on he overraf marke, are raher robus. On he overraf marke if we conro for he riskiness of consumer or for infaion he observe PCMs are more ikey o be beow he non-cousive one bu on he oher oan markes he resus are unchange. These fining wou impy ha he reai banking secor in Hungary behaves fairy cousivey. However, oher facors may aso expain he high margins. The mos imporan ones are swiching coss, markeing aciviy, habi formaion, risk facors, compeiion in crei sanars an coniions. Furher research is necessary o eermine wheher cousion or any of hese facors are responsibe for he arge price-cos margins in he Hungarian banking secor. The res of he paper is organize as foows. Secion 2 escribes shory he Hungarian commercia banking secor. The moe is presene in secion 3. Secion 4 iscusses he esimaion sraegy aong wih our ienifying assumpions. We iscuss characerisics of he aa in secion 5 an presen he resus of he eman esimaion in secion 6. In secion 7, we iscuss he esimaion of a ransog cos funcion an cacuae impie an observe price cos margins. In secion 8, robusness of our resus are ese. Secion 9 concues. 6 As eveope by Berry (1994). The precursory papers incue McFaen (1973, 1978, 1981.) 7 This is paricuary imporan from a poicy perspecive (i.e. merger conro, see e.g. Ivai an Verboven, 2005), where a more compee srucura framework migh be neee o eermine proper reguaion. 8 In Dick (2002) he prouc is an average oar eposis, whie marke share is efine as he number of average eposi accouns a a given meropoian area. We cacuae marke shares from he aggregae eposi an oan amouns in commercia banks naionwie an efine he marke as he eposi an oan amouns in a financia insiuions. 9 Higher purchase oan is efine as unsecure oan for purchase of urabe goos. 6 MNB WORKING PAPERS 2007/1

9 2. The Hungarian banking inusry In Hungary, as in oher financia sysems in he eary sages of eveopmen, he commercia banking secor represens he mos imporan par of he financia inermeiaion. Is effecive funcioning is paricuary imporan in he faciiaion a smooh an efficien reaocaion of financia resources from savers o invesors. In he 1990s, he Hungarian banking sysem wen hrough a horough ransformaion from a sae-owne an money-osing monopoy o an amos fuy privaize, highy profiabe financia secor. 10 Financia marke iberaizaion as we as privaizaion ai he founaions of he moern financia insiuiona sysem. Hungary was he firs counry among he ex-sociais European counries o open he banking marke o foreign sraegic invesors. Iniiay, he governmen recapiaize he sae banks. I quicky became obvious ha recapiaizaion ony enhance he probems cause by sof buge consrains an mora hazar. In orer o improve corporae governance of banks an ecrease fisca coss of recapiaizaions, from 1994 he banks were so o sraegic foreign invesors. Privaizaion was compee by he en of 1997 when a arge banks were conroe by foreign owners. The ony excepion was OTP (Országos Takarékpénzár), he arges Hungarian savings bank, ha was so hrough a pubic offering on he sock exchange, wihou a singe majoriy owner. As of en-2005, foreign ownership of Hungarian banks exceee 80 per cen of oa banking capia. This ime perio can be characerize as one of reaivey high GDP growh, seaiy ecreasing infaion an increasing consumer weah (Tabe 3 presens macroeconomic an financia secor-reae inicaors for ). Accouning profiabiiy The Hungarian banking sysem is very profiabe. Since he beginning of 2001 he ROE of he banking secor has increase from aroun 20 o 30 per cen, whie ROA grew from1.6 per cen o 2.5 per cen. Facors behin his marke improvemen in profiabiiy may incue a rise in ineres earnings arising from sronger reai ening aciviy, a consierabe increase in income from fees an commissions an improve cos-efficiency. Due o he excepionay high profis of he banking secor emporariy he governmen evie a specia banking ax in However, i ha ony a moerae effec on he profi of he banking sysem in Mos of he pre-ax profi of financia insiuions si consiss of ineres income. The ne ineres margin remaine sabe a aroun 4 per cen in 2001 an 2005 mainy ue o he generous sae ineres subsiies on morgage ening an porfoio resrucuring (Tabe 3). Decining profiabiiy in he corporae business urge banks o shif focus. Severa banks have ecie o pursue a more aggressive sraegy in he reai marke. Banks wih higher-han-average ineres margins are si ypicay insiuions ha ea wih consumer ening, housing oans an househo eposis. Concenraion In he firs haf of 1990s, privaizaion an recapiaizaion of sae-owne banks an severa new enries promoe he break-up of he iniia monopoisic marke srucure. In he secon haf of he 1990s, mergers an acquisiions as we as numerous bank iquiaions suspene he faing concenraion of he banking sysem an sabiize he oigopoisic marke srucure. 11 The vaue of he Herfinha inex cacuae on oa asses is aroun 800 bu his aggregae inicaor hies he ifferences across he sub-markes, namey, beween he corporae an househo business ine 12. The egree of concenraion in corporae ening an eposi marke can be consiere ow ( in previous years). On he conrary, he concenraion is high, above 2000, for boh househo oans an eposis. 10 The non-bank financia inermeiaries an financia markes aso experience a ynamic eveopmen in he pas ecae, bu heir roe in financia inermeiaion is si narrow. 11 The secon arges bank, K&H Bank was creae in 2001 by he merger of KBC-owne K&H (Kereskeemi és Hie) Bank an ABN Amro Magyar Bank. The hir arges, MKB (Magyar Kükereskeemi Bank) was creae by MKB s akeover of Konzum Bank in In Ocober 2003, Posabank (he secon-arges reai bank) was so o Erse Bank (of Ausria), areay presen in Hungary. 12 In he U.S., he Deparmen of Jusice s Merger Guieine efines he hresho of a highy concenrae marke a MNB WORKING PAPERS 2007/1 7

10 MAGYAR NEMZETI BANK Wihin he househo crei, concenraion is very high boh on he markes of housing an of consumer oans (Tabe 4) Consumer oans, paricuary he markes of overraf, higher purchase an persona oans are characerize by high concenraion. In oher consumer ening sub-markes, such as car purchase oans an morgage oans wih genera purpose he banking inusry is ess concenrae. The househo eposi marke is aso highy concenrae. One bank (OTP) accouns for a arge share of omesic eposis. The OTP was he soe naion-wie banking eniy, which provie reai eposis an oans for amos 40 years before he esabishmen of wo-ier banking secor (1987). Due o his firs-mover avanage, srong financia obby power as we as he improving managemen, his bank succeee o reain is ominan roe in reai marke. Over he pas 10 years he share of his bank is sowy ecining: he percenage of omesic reai eposis a he OTP roppe from abou 72 o 40 per cen beween 1995 an Parae o his, he concenraion inex for househo eposi marke ecine from 2400 o 2100 (Tabe 4). 8 MNB WORKING PAPERS 2007/1

11 3. Moe The eman moe escribe here foows Dick (2002). She esimaes eman for eposi services of commercia banks using he sanar mehooogy in he iscree choice ieraure (see Berry; 1994). We exen her anaysis o he eposi submarkes an consumer oan markes. Moreover we aso moe he suppy sie. We consier wo moes of he banking inusry: a saic, iffereniae prouc Nash-Berran oigopoy an a care. For each suppy moe he pricing ecisions of he banks epen on he iniviua bank-eve emans. We use he esimae price easiciies o cacuae price-cos margins impie by he wo suppy moes. The simpiciy an parsimony of he iscree choice moes come a some cos, as such moes canno easiy incorporae purchase of muipe goos an ynamic aspecs of eman. 13 Aiiona rawback of our approach is ha prouc characerisics are reae as exogenous variabes. Given ha banks, a eas in he ong-run, choose heir prouc-characerisics, his assumpion cou be unreasonabe 14. On he suppy sie we o no consier price iscriminaion, risks an raioning which cou be imporan a he oan markes. In Hungary, a his ime perio, for he paricuar oan proucs we suie, price iscriminaion an raioning are probaby no ha imporan. In our empirica appicaion, we consier he effec of he banks porfoio risk on he observe ineres raes. We assume he risk is exogenous an ajus our observe oan ineres raes wih i. 3.1 DEMAND FOR DEPOSIT SERVICES AND LOANS On he eman sie, we assume ha consumers have areay sove heir ynamic ong-erm savings probem an he ony ecision hey make a his poin is o choose a bank. So we rea an erive eman funcion for each of our six proucs separaey. Firs, we consier a muinomia ogi eman specificaions for eposi services. Assume ha here are i = 1,...,I consumers inerese in purchasing eposi services from a bank. There are j = 0,1,...J banks an = 1,...T ime perio. j =0 inicaes he ousie opion, which is efine as he oa househos savings minus he eposis in he commercia bank secor. Le each consumer s uiiy funcion be inear such ha he coniiona inirec uiiy of consumer i from choosing bank j s services is: u i = s s δ + ε i = rα r α + x β + ξ + ε i, (1) where r an r s represen ineres raes pai by banks on eposis an fees on eposis respecivey, x is a K imensiona vecor of observe bank characerisics oher han ineres raes, ξ represens bank characerisics unobserve o he economerician (epice as mean across consumers an inepenen across banks), ε i is a ranom isurbance wih zero mean, ienicay an inepeneny isribue across consumers an choices, an θ D =(α, α s, β ) is he K +2 imensiona vecor of mean eve of ase parameers o be esimae. Noe ha he parameers of he uiiy funcion o no epen on iniviua i s characerisics. We assume ha variaion in consumers ase eners ony hrough he aiive erm, ε i. Consumers maximize heir uiiy an choose bank j whenever i gives hem he highes uiiy, i.e. U(r, r s, x j j j, ξ j, z i, θ D ) U(r, r s, x, ξ, z i, θ D ) for a j, where z i capures consumer specific erms ha are no observe by he economerician. Bank s pricing ecision is base on he bank s expecaion abou is eman: s = I i= 1 E( U( r, r s, x, ξ, z ;θ i D s ) maxu( r, r, x, ξ, z ; θ )) j i D 13 In he banking secor he exisence of swiching coss wou require he ynamic moeing of eman an suppy. The ciens o no choice among banks in each perio, causing persisence in he eman. However, he persisence in he eman affecs he pricing behavior of banks. In case of high swiching coss wih an aequae price-seing banks can increase he number of core ciens, i.e. insae base. 14 A souion wou require a ynamic moe in which no ony prices bu aso prouc characerisics are eermine wihin he moe. We eave his for fuure research. MNB WORKING PAPERS 2007/1 9

12 MAGYAR NEMZETI BANK In his expression, E is he bank s expecaion over he unobservabes in U. (Here, he bank is assume o know he size of he marke I.) The bank s expece aggregae eman can equivaeny be expresse as he sum of banks probabiiy assessmens ha consumers wi open a eposi a bank j : s I = i=1 Pr(i opens a eposi accoun a bank j). This expression shows us how banks uncerainies abou heir environmen (i.e., heir uncerainies abou consumers ases) wi ener a srucura moe of compeiion. Once we aop a specific, simpifying, ahough a resricive ogisic probabiiy moe for consumers prouc choices, he prouc-eve emans simpy are sums of consumers purchase probabiiies. The cose form souion of he muinomia ogi moe is he foowing: ( δ ) ( ) exp s ( δ ) =, j = 1,... J. J exp r = 0 δ r The consumer oan eman is specifie simiary o he eposi services eman. Assume ha here are m = 1,...,M consumers inerese in borrowing from a bank. Le each consumer s uiiy funcion inear such ha he coniiona inirec uiiy of consumer i from choosing bank j s services is (2) u m = s s δ + ε m = rα + r α + x β + ξ j + ε m, (3) where r an r s represens ineres raes pai by consumers on oans an fees on oans respecivey, an he oher variabes efine as in equaion (1). The cose form souion of he muinomia ogi moe is he foowing: ( δ ) ( ) exp s () δ =, j = 1,... J. J exp r = 0 δr 3.2 SUPPLY OF DEPOSIT SERVICES AND LOANS We consier wo moes of compeiion on he suppy sie. In our suppy moes, simiary o he earier papers, we assume ha banks maximize heir profi separaey in each sub-marke an ha he inerbank marke is perfecy compeiive. The separae profi maximizaion cou be a fairy resricive assumpion since banks very ofen bune heir proucs. Buning an oher unobserve (by us) swiching coss probaby make he eman ess easic o ineres rae changes. This increases he PCMs impie by our iffereniae prouc Nash-Berran moe meaning ha even our non-cousive benchmark moe is ess compeiive. (4) Firs, we erive firs-orer coniions in a iffereniae prouc Berran moe. Secon, we erive firs-orer coniions for a care. Assume ha here are J profi-maximizing banks choosing ineres raes an fees o maximize heir profis boh on he eposi an on he oan markes separaey (i.e. no buning) uner iquiiy consrain. The profi funcion of each bank is he foowing: s r Max, r, r, r s π j s s ( r r ) I s ( δ ) + ( r + r ) M s ( δ ) C ( I s ( δ ), M s ( ) + R r, = δ s.. ( δ ) = M s ( δ) R I s + (5) where R is he ne inerbank exposure a r ineres rae. I an M are he eposi an oan marke size. The profi funcion consis of he revenue from he eposi markes, he revenue from he oan markes, minus he cos (C ), an finay a ne baance of inerbank acions. The baance shee consrain saes ha he oa eposi amouns shou be equa o he oa oan amoun pus he ne inerbank exposure. We assume ha he inerbank marke is perfecy compeiive an banks can borrow an en a he same ineres rae r. The cos funcion consiss of non-ineres coss such as wages an capia coss. Afer subsiuing he consrains: 10 MNB WORKING PAPERS 2007/1

13 MODEL π j = s s ( r r ) Is ( δ ) + ( r + r) M s ( δ ) C ( I s ( δ ) M s ( δ ) + ( I s ( δ ) M s ( δ ) r., (6) We assume ha eposi ineres raes have no effec on he oan marke share an vice versa. The firs-orer coniions for bank j are he foowing: s ( r r + r c ) s ( r r + r c ) s ( r + r r c ) s ( r + r r c ) s = s s = s s = s s = ( δ ) s ( ), δ r ( δ ) ( ), δ s r () δ (), δ r () δ (). δ s r (7) (8) (9) (10) The firs-orer coniions can be easiy ransforme o he famiiar Lerner-ineces by iviing boh sies wih he appropriae ineres rae or service fee. The Lerner-inex saes ha he margina revenue minus he margina cos of he banks (c ), ivie by he price shou be equa o he resiua eman easiciies. In our case he margina revenue on eposis is equa o he sum of service fee an inerbank ineres rae. The margina cos is equa o he pai ineres rae pus he non-ineres margina cos. On oans he margina revenue is he sum of he charge ineres rae an service fees. The margina cos is he sum of inerbank ineres rae an non-ineres margina coss. In case of care he banks maximize heir join profi. The profi funcion is he sum of he iniviua banks profi. r s Max s, r, r, r j = 1,.. J J j = 1 π j J = j = 1 s s ( r r ) I s ( δ ) + ( r + r) M s ( δ ) C ( I s ( δ ), M s ( δ ))+ R r (11) ( δ ) = M s ( δ) R for every j s.. I s + where R is he ne inerbank exposure a r ineres rae. I an M are he eposi an oan marke size. Afer subsiuing he consrains we ge he foowing: π j J = s s ( r r) Is ( δ ) + ( r + r) M s ( δ ) C ( Is ( δ ), M s ( δ ) + ( I s ( δ ) M s ( δ ) r j = 1. (12) MNB WORKING PAPERS 2007/1 11

14 MAGYAR NEMZETI BANK The firs-orer coniions for bank j : s ( r r + r c ) sk ( δ ) s ( ) s δ s r = ( r r + r ) ( ) ( ), k k c s k δ s δ s ( r r + r c ) s ( r r r c ) sk () δ s () s δ s r + = ( ) () (). rk + rk r ck s δ s δ s ( r r r c ) sk ( δ ) ( ) s δ s r = ( ) ( r r + r ) ( ), s k k c k δ s δ r r s sk () δ s () δ s r + = ( ) () (), rk + rk r ck s δ s δ r s r k j k j k j k j r s r r s r (13) (14) (15) (16) In a cousive equiibrium he profi-maximizing banks inernaize he negaive business seaing effec hey have on oher banks an charge a higher price (higher/ower ineres raes in case of oans/eposis.) In he nex secions we esimae eman funcions for eposi services an oans an cacuae he corresponing easiciies. We esimae he margina cos funcions of iniviua banks for each prouc. Using he firs-orer coniions erive above we hen make inferences abou which moe of compeiion fis he aa beer. 12 MNB WORKING PAPERS 2007/1

15 4. Deman esimaion The usua probem in esimaing a marke eman moe in a iffereniae proucs inusry is ha prices are correae wih he unobserve eman facors (such as sye or service quaiy). This enogeneiy probem resus in biase parameer esimaes. I has been ocumene in he ieraure ha ignoring his correaion may even ea o upwar soping eman curves (Berry, 1994; Berry e a., 1995). In his paper we rey on he approach eveope by Berry (1994) ha akes a iscree choice moe conex as a saring poin. The obvious remey for his enogeneiy probem is o use insrumena variabes. In such a iscree choice seing prices an he unobserve prouc characerisics ener eman equaions in a noninear way ha makes he appicaion of insrumena variabes meho cumbersome. Berry (1994) proposes an esimaion proceure, which avois his probem by ransforming he equaion so ha he parameers ener he objecive funcion ineary. Logi specificaion Le S an S be he observe marke shares of bank j in ime perio on he eman an oan markes an s an s he preice marke shares from he moe. We rea acua saes, q, as a reaizaion from he eman curve ha he bank uses o se is price. We assume ha he isribuion of he consumer variabes is he same for each of he I an M consumers in he eposi an oan markes, respecivey. Then we can repace he househo-specific probabiiies Pr(r j, r s j, x j, ξ j, z i, θ D ) wih unconiiona purchase probabiiies. A he rue vaue of mean uiiy eves (δ ) he foowing equaions ho: S = I s ( δ ) an S = M s ( δ ). In he case of he ogi moe one can sove anayicay for he mean uiiy eves. Oherwise numerica souions are necessary. The mean uiiy eve wi be uniquey eermine by he observe marke shares. The sanar ogi eman equaion wi have he foowing form for eposi suppy (normaizing he mean uiiy of he 0h ousie goo o zero): s s ( S ) n( S ) = δ = r α r α + x β + ξ, n 0 (17) an for oan eman: s s () S n() S = δ = r α + r α + x β + ξ. n 0 (18) One can esimae hese equaions by a simpe orinary eas square regressions. The ineres raes are poeniay enogenous bu a sanar inear insrumena variabe meho can be use o avoi his probem. We cacuae corresponing own price easiciies of bank j in perio, accoring o he foowing formua ha can be easiy erive from equaions (1 an 2). The eposi rae easiciy is η jk s = r k r s k = α α r rk sk ( 1 s ) if j = k, if j k (19) an he service fee easiciy can be cacuae as: η s jk s = r s k r s s k = α α r s s k s s s rk sk ( 1 s ) if j = k. if j k (20) MNB WORKING PAPERS 2007/1 13

16 MAGYAR NEMZETI BANK Loan rae easiciies are cacuae corresponingy. Esimaes of he price-cos margins can be obaine by a simpe cacuaion from he esimae eposi service an oan eman parameers. Nese ogi specificaion The simpe ogi moe has he so-cae inepenence of irreevan aernaives propery when ony aggregae aa are avaiabe an very resricive subsiuion paerns. The moe impies ha if wo proucs have he same marke share hen hey have he same cross-price easiciies an he same markups. To miigae his probem we consier a nese ogi specificaion. This requires an a priori grouping of banks ha are beieve o be correae wih respec o consumer preferences over hem. In his case, a priori grouping of banks imi he probem of resricive subsiuion o proucs wihin he group. The esimae equaion wi become he foowing (see Berry, 1994): s s ( S ) n( S ) = δ = r α r α + x β + σ n( s j g) + ξ, n / 0 (21) where s represens he marke share of eposi prouc j which beongs o group g as a fracion of he oa group j/g share a ime. This erm is aso enogenous an insrumena variabes are necessary o obain consisen esimaes. The impie own- an cross-price easiciies for he eposi ineres raes are: ε ε j s s = r ( δ ) ( δ ) ( δ ) 1 rk 1 σ rk jk = = r s ( ) rkα s k δ k s r 1 = rα 1 σ α ( σ s j / g + ( 1 σ) s 1), ( σ s j / g + ( 1 σ ) sk) if j k an k g, if j k an k g (22) (23) where σ is he wihin group correaion of uiiy eves. These easiciies refer o he percenage change in marke share in response o a change in price. The cross-price easiciy beween prouc j an prouc k ocae in a ifferen group g is inepenen of j The easiciies for crei ineres raes can be cacuae in a simiar way. 14 MNB WORKING PAPERS 2007/1

17 5. Daa an variabes We covere six reai sub-markes, hree on he ening (overraf, higher purchase an persona oans) an hree on he eposi sies (eman, shor-erm an ong-erm eposis.) 16 Monhy aa for he perio of January 2003 December 2005 were use for he empirica anaysis, excep for higher purchase an persona oan markes, where aa were avaiabe ony for May 2004 December In case of higher purchase an persona oan markes we empoye annua charge (APRC) cacuae on new Hungarian forin (HUF) crei as a proxy for price, which incues no ony he ineres rae bu aso he aiiona fees an commissions. In oher marke segmens he ineres raes cacuae on he exising sock of HUF crei or eposi were avaiabe ony. The service fee for eposi marke is approximae by he raio of revenue from fees an commissions 17 o he sock of eposis. The marke share was proxie by he sock of crei or eposi amouns a he en of a monh by a cerain bank in percenage of he whoe marke size in a marke segmens separaey. We choose he bank aribues base on he avaiabiiy an reiabiiy of aa an heir imporance an observabiiy o he consumers. Tabe 5 escribes he summary saisics of our variabes. Mos of he avaiabe aa measure observe bank characerisics a he naiona marke eve so in every given ime perio we observe ony a singe marke in each prouc caegory. Due o he changing srucure of he banking-secor he number of banks in he cross-secions migh vary over ime an across ifferen sub-markes. The aa is coece from severa sources. Bank characerisics informaion are from he Hungarian Financia Supervisors Auhoriy, from he Naiona Bank of Hungary an from he websies of he banks. Banks are obige o repor baance shee an income saemen informaion every monh o he Hungarian FSA an are aske o provie aa on furher bank characerisics (such as number of branches, number of empoyees). Capuring heerogeneiy an prouc iffereniaion The proucs in our anaysis are eposi services an oans. The iffereniaing facors are he ifferen characerisics of banks. We have a few characerisics of banks ha we can observe. We use he number of branches as a proxy of spaia iffereniaion an average number of empoyees in a branch as a proxy for service quaiy. We cacuae an age variabe (ha can capure some aspec of repuaion, reiabiiy, experience) base on he esabishmen ae of he banks. We efine hree groups base on he oa asses of banks: sma banks (ha we choose as a reference group), meium-size banks (Meium), an a arge bank (Big) ha is OTP. Defining reevan marke We efine he marke as he oa househo eposis an oa consumer oans (excuing oans for vehice purchase) enominae in HUF in a moneary financia insiuions (MFIs) in Hungary an cacuae marke shares from he eposi an oan amouns in commercia banks naionwie. Oher moneary financia insiuions (such as hrifs an crei unions) consiue he ousie goo in our eman moe. Our choice of he marke an herefore of he ousie goo was riven by wo main facs. Firs, we use ony HUF socks since foreign exchange consumer ening (excuing oans for vehice purchase) an borrowing were imie in our ime perio. Secon, we use aa of MFIs because of aa imiaions bu non-mfis paye imie roe in financia inermeiaion on he invesigae sub-markes We o no cover he morage ening for wo reasons: ue o he ack of marke pricing in Hungarian forin morgage ening (ineres raes are eermine by sae subsiy scheme) an ue o he shor sampe perio of foreign currency enominae morgage ening. 17 Fees an commissions can seam from ening aciviy aso. 18 Noe ha if we efine he marke in a broaer way, we wou probaby obain higher price easiciies, i.e. ower price-cos margins in boh hypoheica cases. As he observe margins wou say unchange, his wou shif our overa concusion owars ess compeiive markes. MNB WORKING PAPERS 2007/1 15

18 MAGYAR NEMZETI BANK Creaing ness Accoring o he main characerisics of Hungarian banks reai aciviy severa groups of aernaives, i.e. nesing eves can be forme. The firs nes incues ony one bank cae OTP, which is he arges one in Hungary. The separaion of OTP can be expaine by is hisory. The OTP was he soe naion-wie banking eniy, which provie reai eposis an oans for amos 40 years before he esabishmen of wo-ier banking secor (1987). Due o his significan compeiive ege, srong financia obby power as we as he improving managemen abiiy his bank succeee o reain is ominan roe in reai marke uni now. In he secon nes, he meium size universa banks can be foun, which srongy compee wih each oher for he reai ciens. Afer he consoiaion an resrucuring of Hungarian banking secor ( ) his group of banking eniies experience severa marke enries an M&A s eaing o improving cos efficiency an profiabiiy. The res consiss of sma banks ha have very imie marke aciviy or focus ony on one niche marke, e.g. ac as a meiaor in promoing naionaiy base economic, financia an rae reaions or offer speciaize proucs an services. These banks are coece in he hir nes. Choice of insrumens Unobserve bank characerisics, such as service quaiy, repuaion, crei coniions oher han ineres raes, experience may capure some aspec of sounness of an insiuion for consumers an herefore, infuence consumers ecision. Such characerisics may aso be correae wih prices an make hem enogenous. To avoi he enogeneiy bias we op for using insrumena variabes (IV) esimaion. Dick (2002) iss severa possibiiies (which she cas cos shifers) from which we use a measure for crei risk 19, capia aequacy raio, he raio of iqui asses o oa asses, operaiona cos per eposis, share of oans per oa asses, an he average saary per capia of oher banks 20 in a perio. These variabes, whie having some infuence on he cos of he proucs, are ikey o be exogenous o he pricing ecisions of he banks. In aiion o he cos shifers, a common pracise in he iscree choice ieraure (base on Berry e a., 1995) is o use he characerisics of oher proucs in he marke as insrumens for price. The ieraure refer o hem as BLP insrumens an we keep his noaion hroughou he paper. In he nese ogi specificaion (s ) is aso ikey o be correae wih j/g he unobserve bank characerisics an herefore nees o be insrumene. We use BLP-ype of insrumens again, namey, we use he characerisics of oher banks in a nes group for he wihin marke share of a given bank. We empoy ime ummies o capure he changes in he economy ha can be consiere o have a non bank-specific effec on consumer choice. These non bank-specific effecs incue changes in consumer weah, changes in reguaions ha affec he eposi base of each banks. 19 Crei risk is reae o cos of oans, a he same ime, banks may cross-subsiize hem by shifing some of heir cos owars oher proucs. 20 The average saary in a bank may be correae wih service quaiy since empoyees are more moivae or because he higher saary is ikey o arac more quaifie workers. 16 MNB WORKING PAPERS 2007/1

19 6. Resus of eman esimaions As we iscusse before, he ogi an nese ogi specificaions can be esimae by regressing he ogarihms of observe marke shares (n(s ) n(s )) on prices, oher prouc characerisics an ime ummies. Tabe 6 an Tabe 0 7 ispay he resus of 2SLS esimaion using cos shifers an BLP insrumens for ogi as we as nese ogi specificaions respecivey. The coumns of he abes refer o he consumer ening sub-markes, such as overraf, higher purchase oans, persona oans an o he househo eposi sub-markes, such as eman, shor-erm, an ong-erm eposis. The firs se of rows show he coefficiens of expanaory variabes, hen he cacuae easiciies can be foun, finay he characerisics of esimaions are presene. Accoring o he R 2 an F-saisics he fi of firs sage regressions can be consiere goo in a cases. The firs sage regressions wih regar o he nes variabe show reasonaby goo fi as we. These sugges ha our insrumens are sufficieny correae wih he enogenous ineres rae variabes. Overienificaion ess are accepe in amos a cases a one per cen significance eve. The es is rejece ony for he marke of higher purchase oan in ogi specificaion. In he foowing, we invesigae he esimaion resus of ogi an nese ogi specificaion in more eai (Tabe 6 an Tabe 7). 6.1 CONSUMER LOANS On he consumer ening sub-markes, we fin a negaive reaionship beween price an marke share. A coefficiens of price variabes were significan an negaive in boh he ogi an nese ogi esimaions. In he nese ogi specificaion ower coefficiens of consumer oans were foun. Noe, however, ha, our nese ogi moe of he higher purchase oans appears o be misspecifie since he parameer of nes variabe oes no significany iffer from zero. 21 The correaion parameers of oher consumer ening sub-markes appear o be cose o one, inicaing ha consumer preferences across banks in he same ness are highy correae. Accoring o our esimaion resus, he number of branches variabe has a posiive impac on he eman of oans. 22 Boh specificaions share his feaure, he coefficiens are aways highy significan. The empoyees per branch variabe is aso significan wih a posiive sign in he majoriy of cases, excep for persona oans in ogi specificaion an overraf in nese ogi specificaion. The parameers of he age variabe (ha is a proxy for experience) are posiive for higher purchase an persona oans an negaive, bu insignifican for overraf in he insrumene ogi regressions. Ineresingy he big (o which ony he arges OTP bank beongs) an meium groups have negaive signs in mos of he markes oher han ong-erm eposis. OTP as he o sociais monopoy bank is si ajusing o a compeiive environmen an grauay osing consumers o oher, younger rivas. Furher expanaion migh be ha he sma banks are speciaize on he consumer ening an have specific ciens wih ifferen risk characerisics. Own price easiciies cacuae base on he equaions (19) an (22) are a negaive an significan. The ogi specificaion resus in reaivey easic own price easiciies, -5.4 for overraf, -4.6 for higher purchase oan an -5-9 for persona oan, respecivey. The easiciies are simiar in size o he esimaion of Móré an Nagy (2004) on he aggregae consumer ening marke. However, in he case of our nese ogi moe-specificaion own price easiciies are more moes in absoue vaue, in he range of -2.5 (overraf) an -2.1 (higher purchase oan) near o he heoreica minimum eve. 23 This cou inicae ha crei coniions (i.e coaera, repaymen scheue, ec.) are aso very imporan par of consumers ecision on oans. 21 Low an insignifican coefficien of nes variabe means ha nes-creaion is no appropriae. The ow number of observaions (aroun 80) cou be he reason of misspecificaion. 22 In case of higher purchase oan, he proucs are so mainy hrough eaers so here he size of he branch-nework is probaby a proxy for he number of eaers. 23 Theoreicay, profi-maximizing oigopoisic firms shou operae a he easic par (wih price easiciy arger han 1 in absoue vaue) of he eman curve. MNB WORKING PAPERS 2007/1 17

20 MAGYAR NEMZETI BANK 6.2 HOUSEHOLD DEPOSITS The parameers of he eposi rae are posiive an significan an he coefficiens of he service fees are significan an negaive. This sugges ha consumers respon o prices an service fees on he eposi marke. Parameers of nes variabe are aways significan an reaivey high, suggesing ha he creaion of ness is appropriae. In mos cases he observe bank characerisics are significan an have he expece sign. The number of branches are foun o infuence consumers bank choices significany an posiivey. Aso, he parameer of he number of empoyees per branch is mosy posiive an significan. The Big ummy is negaivey reae o he bank eman. The eveopmen of branch srucure can serve as an expanaion. OTP has by far he arges number of branches, bu in he as coupe years he oher banks opene new reai branches o cach up wih OTP. Own price easiciies are aroun 5 for eman eposi, 8.5 for shor-erm eposi, an 6.2 for ong-erm eposi as cacuae from he resus of ogi specificaion. In case of nese ogi specificaion he easiciies are foun in a higher an wier range opposie o he consumer ening markes. Easiciies amoun o 10.8 for eman eposi, 19.9 for shor-erm eposi, 8.2 for ong-erm eposis, respecivey. Móré an Nagy (2004) foun ha he own-price easiciy of eposi is aroun 10. However, hey invesigae eposi on aggregae eve, incuing he borrowings of househo, corporae an governmen secors. We fin in he ogi specificaion, ha emans for a ypes of eposis are ineasic or sighy easic wih respec o service fees. In he ogi specificaion he ineasiciy of services fees in case of overraf an shor-erm eposi oes no sugges profi maximizing behavior of banks in his respec. This fining is simiar o Dick s (2002) or Nakane e a. (2006). They argue ha banks may use ow or zero-fee checking accoun as oss eaers o arac consumers or higher raes cou rigger reguaory inervenion. In our case, he service fee was compue an i possiby cou aso incue some service fee on oans which isor he finings. In he nese ogi specificaion he eman is sighy easic on service fees in a marke segmens. 18 MNB WORKING PAPERS 2007/1

21 7. Measuring he egree of compeiion In orer o eermine which moe fis he banking inusry, we compue he margins impie by he Berran an care moes an compare hem wih he esimae observe price-cos margins (PCMs.) The PCMs of Berran an care cases can be cacuae from he righ han-sie of he firs-orer coniions, escribe by equaions (7), (10) an (13), (16), respecivey. The observe PCMs can be obaine from he ef han sie of he firs orer coniions, using he observe ineres raes an esimaes of bank an prouc specific margina coss. We consier an upper an a ower imi on he rue margina coss. Firs, we assume ha margina coss are zero, which provies a ower imi on he rue margina coss. Secon, we erive he margina coss from an esimae ransog cos funcions which provies an upper imi since we rea a coss as variabe. Since our esimaes cou be quie noisy we aso cacuae he margina cos eve which wou make he observe PCMs consisen wih he PCMs impie by he Berran moe. 7.1 COST FUNCTION Our ransog cos funcion is compaibe wih he muipe oupu proucion of he banks an provies a secon-orer Tayor series approximaion of an arbirary funcion a he mean of he aa. In our cos moe, banks prouce wo oupus an wo inpus. The firs oupu is efine as he proucion of a bank in a cerain sub-marke (overraf, higher purchase oan, persona crei, eman eposi, shor-erm, ong-erm eposi, respecivey), whie he secon oupu is he res of is oa asses. 24 Inpus consis of abour an physica capia. Labour cos is approximae by he raio of persona expenses o he number of empoyees, whie he price of physica capia is proxie by he ifference beween a non-ineres an persona expenses o fixe asses. The oa cos is herefore he sum of he non-ineres expenses. Foowing Kim (1985) our moe consiss of he ransog cos funcion an cos share equaions for he inpus (Shephar s emma) as foows: n( TC ) = λ ( ) 2 n m τ n r nq ϕ mr n + m (n P m υ m n P n P r m ) n m n χ p nm φ np nq (nq n n n P nq m p + η i ), (24) S m m r = + ϕmr n P + r n υ χ nq + ϑ nm n m i (25) where TC correspons o oa coss, Q n is he n h (n = 1.2) oupu, P m is he m h (m = 1.2) inpu price of bank j in ime, λ is common consan an S is cos share, i.e. expeniures on inpu m ivie by oa cos. Symmery an inear homogeneiy require he foowing parameer resricions: φ np = m φ, =, = 1, = 0, pn ϕmp ϕ pm υ j ϕmr χnm = 0. m r m We aow he correaion of error erms on he cos funcion an share equaions, bu we assume he correaion is zero across banks. Since nq is an enogenous variabe, we use ieraive hree-sage eas squares an characerisics of riva banks as insrumens o esimae he sysem of hree equaions. 24 If we wou consier more oupus, he number of parameers o be esimae wou increase beyon our imie aa. MNB WORKING PAPERS 2007/1 19

22 MAGYAR NEMZETI BANK Then he margina cos funcion, c s (where s sans for he specific prouc which is aways prouc 1 in he cos funcion) can be cacuae by aking he firs orer coniion of he ransog cos funcion wih respec o firs oupu on he sub-marke s in he foowing manner: c 1 TC = Q ( τ + φ11 nq + φ12 nq + χ11 n P + χ 2 12 n P 2 ). (26) Here we assume ha a banks are X-efficien. 25 Tabe epics parameer esimaes for cos funcion. Base on he - saisics an he vaue of he ajuse R 2 he overa fi of he cos equaions can be consiere very goo for a marke segmens. Sanar eviaions of iniviua margina coss (cacuae by he ea meho) of bank j in ime are ow excep for he marke of eman eposi, which means ha for he majoriy of sub-markes our observe price-cos margins (cacuae wih observe ineres raes an he esimae margina coss) have ow sanar errors as we. Tabe repors he average margina coss from he cos funcion esimaions an he resiua margina coss ha are impue from our suppy moes an eman easiciies esimaes. 7.2 RESULTS: OBSERVED AND IMPLIED PRICE-COST MARGINS Tabes 10, 11 an show he resus for absoue (profi margins) an reaive (Lerner-inex) price-cos margins, incuing he means of observe margins an he impie margins of Berran compeiion an care souion (cacuae wih he esimae eman easiciies.) For consumer sub-markes means of observe Lerner-ineces are for overraf an aroun 0.6 for persona an higher purchase oans. The observe profi margins are aroun haf of he annua charges (APRC) on he oan markes. The averages of impie Berran an care PCMs are aso high. The observe mean PCMs are generay above he impie Berran ones excep for he overraf nese-ogi case. On he househo eposis sie, for eman eposi he mean of observe PCMs is very high, 8.5. In case of shor- an ong-erm eposis he means of observe PCMs are ony 0.13 an 0.17 respecivey. Means of impie Berran an care PCMs are reaivey ow in a eposi marke segmens. The observe mean PCMs are above he impie Berran ones for eman eposis an shor-erm eposi an beow for ong-erm eposis. From Tabe 12 i is apparen ha in mos of he sub-markes hrough ime he observe PCMs are ecreasing. This cou possiby inicae ha hrough ime he commercia banking secor is becoming more an more compeiive. Noe ha, we canno provie evience on he egree of compeiion base on a simpe comparison of mean vaues as boh observe vaues an aso preice Berran an care PCMs are scaere in a reaivey wie range hroughou banks an ime perio as we (Tabe 11 an 12). Therefore we foow he marke power es of Nakane e a. (2006) an compare observe an impie margins for each banks. Banks are sore in hree inervas accoring o heir observe PCMs: ower han he impie Berran vaue, beween Berran an care vaue or above care vaue. We efine he egree of compeiion ow if he majoriy of observe vaues are higher han he preice vaues of Berran moe. 27 Tabe 13 summarizes he resus showing boh he frequency an he banks marke share weighe frequency of observaions in each inerva. The concusion on he egree of compeiion is quaiaivey he same for he wo aernaive aggregaions. On he househo oan sie, he ogi resus for overraf, higher purchase an persona oans, inicaes ha he observe price-cos margins are very cose o or even above he impie margins of he care. In he nese ogi case a higher raio of observe margins is uner he Berran vaues, bu he majoriy of observe margins are si above. On he househo eposi sie, for eman eposis he ogi an he nese moes show simiar resus. The observe PCMs are cose o he care vaues. In he case of shor-erm an ong-erm eposi markes, in he ogi specificaion mos of he observe PCMs are beow he Berran vaues. In he nese ogi specificaion, however, shorerm eposis urn aroun an he majoriy of observe margins are above he Berran vaues. 25 Composie errors of he cos funcion may incue (X-)inefficiency erms. Here we assume ha every banks are on he cos fronier, i.e. inefficiency erms equa o zero. 26 For eposi services we repor he ineres rae PCMs wihou he service fees. In he nex secion we incue service fees as we (Tabe 19) The resus are simiar. 27 Berran an care PCMs confience inervas of a given bank are overappe ony in few cases. 20 MNB WORKING PAPERS 2007/1