Banking competition in highly regulated markets (People and Society)
Investigação | 19 janeiro 2016 Banking competition in highly regulated markets (People and Society)

Recent study measured competition in Portuguese commercial banking during the Golden Age | Researcher: Luciano Amaral

In a recent paper by Nova SBE’s Professor Luciano Amaral, a statistical test is used to measure competition in the Portuguese commercial banking market between 1960 and 1973. The main finding is that the market had a reasonable degree of competition, despite legislation trying to prevent it. The agents in the market were able to overcome the limits of the law and finance the Portuguese economy in the period of fastest growth in all of its history.

The essential purpose of this paper is to apply to the Portuguese commercial banking market in the period of the Golden Age years of economic growth (1960-1973) the standard H-statistic measure of competition, developed by James Rosse and John Panzar. Tests of the Panzar-Rosse type are standard in the literature on competition in current banking markets, but they have not been used in economic history. This is, hence, the first paper doing it.

The paper was motivated by a crucial question having both a Portuguese and a European dimension: was the Portuguese financial system (and the European financial systems) so heavily regulated that it (they) worked as a hindrance to economic growth? The institutional environment of Portuguese banking during the Golden Age years has often been criticized for not allowing banks to contribute effectively to finance growth.

Portugal had a very restrictive banking legislation, similar to what existed then in most of the world. The authoritarian regime existing in Portugal (the Estado Novo) had a strong dirigisme penchant in economic terms. Although the legislation practically forbade banking competition, this paper shows that the banks were able to use the loopholes of the legislation in order to compete and, thus, spontaneously organize a more efficient market.

The finding was reached through the use of a statistical framework of the Panzar-Rosse type. This is a non-structural approach, with fairly low data requirements, something that is always interesting for economic history. The Panzar-Rosse approach also has the advantage of overcoming the limitations of the structure-conduct-performance paradigm, especially its derivation of inferences on competition from simple measures of concentration.

The results demonstrate that between 1960 and 1973 the Portuguese commercial banks had a reasonable degree of competition. The obvious implication of this conclusion is to deny the traditional “rentist” picture of Portuguese commercial banks.

About the author: Luciano Amaral dedicates most of his research to matters of economic growth in historical perspective and, recently, to banking history. He teaches Economic History, Business History and Political and Institutional History at Nova SBE.

Publication details: “Measuring competition in Portuguese commercial banking during the Golden Age (1960–1973)”, Business History, Volume 57, Issue 8, 2015, pp. 1191-1218.

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