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Banking competition, market structure and financial stability of the Gulf Cooperation Council region

Student thesis: Doctoral Thesis

  • Sara Mohamed Abdulwahab Alfaihani
The first introduction of market competition concept was by Adam Smith in the 18th century. This inspired scholars for two main views of competition: static and dynamic. The development of several theories of competition has resulted in numerous methodologies to measure banking competition that can be classified into two main categories: structural and non-structural. Moreover, the history of competition law began in the USA, UK and the EU who have succeeded in building solid antitrust regimes. On the other hand, the young economies of the Gulf region have enacted competition law very recently and lacks clear merger guidelines especially for the banking sector. A comprehensive and detailed review of competition theories, policies, and measures applied by both academics and antitrust authorities worldwide show that there is a disagreement in the banking literature regarding which competition measures best reflect the degree of competition given the strengths and drawbacks of each measure. Also, banking regulations in the Gulf Cooperation Council (GCC) countries lacks clear merger guidelines and ignores measures of competition as one of the criteria. This thesis proceeds with three main empirical analyses.

The first empirical chapter explores the market structure and the size-structure relationship in the GCC banking industry over the period 2000-2017. The concentration measures indicate that the GCC banking market are operating under somewhat concentrated conditions except for UAE and Saudi Arabia. Also, there exist a lower bound to concentration and the market remains
concentrated regardless of market size. This implies that the banking industry of the GCC is an endogenous sunk cost industry, whereby the limiting levels of concentration are positive and bounded well above zero. Moreover, the limiting levels are increasing over time, so largest banks become more dominant, and are different between individual countries due to market size and set-up costs. Finally, the values of the limiting and actual levels of concentration are astonishingly close, which indicates that the banking markets of the GCC countries are operating under a long-run equilibrium.

The second empirical chapter investigates the competition in the GCC banking sector by applying the modified Lerner Index that takes the scale of operation
into account. We find evidence that up to 86% of banks are optimally scaled. About 10% of banks are larger than the maximum productive scale size, and the market power of nearly all of them is larger than that suggested by the conventional Lerner Index. Half of the banks that operate with economies of scale actually have larger market power than the conventional Lerner Index predicts. These results may be manifestations of the future, where some banks that have large market power consolidate and grow even further.

The third empirical chapter examines the relationship between banking competition and financial stability in the GCC banking sector over the period 2000–2017. The paper proceeds with three main analyses. First, we examine the scale economies of GCC banks in a statistical sense and find that around 85% of bank-years are operating under economies of scale whereas the remaining 15% are at the optimal scale. Second, we measure banks’ market power using the Lerner Index and a scale-corrected Lerner Index. Both versions of the Lerner Index indicate that banks under economies of scale enjoy higher market power than banks with the optimal scale. Finally, we examine the competition–stability relationship between GCC banks. Overall, higher market power leads to greater financial stability, in line with the competition–fragility view. This full-sample relationship holds across all GCC countries except for Qatar, where the cross country analysis shows that higher competition contributes positively to stability.
Original languageEnglish
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Award dateMar 2020

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