Efficiency, Competition and the Shadow Price of Capital
The purpose in writing this chapter encompasses several different motivations. The starting point is the study of recent developments in modeling banking systems from the point of view of the economics of industrial organization. This approach has gained attention in recent years due to the work of Freixas and Rochet (2008) and Degryse et al. (2009). There is a need to understand how efficiency can be evaluated in the banking system over the last decade. In addition it is useful to estimate the cost of equity capital, the primary loss-absorbing capacity of the banking system. This is difficult when some banks are not listed on the stock market, even though the necessity to raise equity capital remains important. Therefore a major motivation for the chapter is to suggest a model for estimating the shadow price of equity capital, or the shadow return on equity. These two aspects of efficiency and profitability come together in the measurement of competition in banking systems. This is a venerable topic in banking economics; but, in particular, the chapter examines recent developments in the literature, which bring together a measure of efficiency and a measure of profitability for the purpose of measuring the strength of competition.
KeywordsBanking System Quantile Regression Shadow Price Equity Capital Stochastic Frontier Analysis
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