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Market power versus efficiency in the Ecuadorian bank credit market

Abstract:

This paper analyzes credit level determinants from a microeconomic standpoint. Furthermore, we test market power and efficiency hypotheses on credit levels in general, which are then classified as high- or low-risk. We use the non-parametric Data Envelopment Analysis (DEA) and a two-step system Generalized Method of Moments (GMM) approach. In addition, we do robustness checks using other market power variables to demonstrate that our results do not change. The main findings uncover evidence that supports the efficiency hypothesis vis-a-vis market power in determining total credit, high-risk credit, and low-risk credit allocation. This result indirectly suggests that banks operate at optimal costs and have correct operational management regarding the placement of credits. The most efficient banks may have better placement processes, better risk scores, and better information management of potential clients, which could lead to a greater market share (because of efficiency rather than concentration).