How best to improve competition in the banking market Essay - 1

How best to improve competition in the banking market - Essay Example In most cases, application of the efficient structure hypothesis is projected in two primary ways depending on the nature of efficiency considered. When considering the X-efficiency form, the more efficient organizations have relatively lower costs, which results to higher profits and a larger share market. According to WISE, BLINDER & GORDON, (2001), this is true because of presence of superior ability in diminishing production costs. On the other hand, Scale Efficiency form serves the same purpose as the X-efficiency, since it works towards achieving production to the minimum average-cost point. Relationship between quiet Life Hypothesis and efficiency structure If quiet life hypothesis holds, then it implies that, the positive profit structure association is partially offset by cost increase from poorer cost efficiency, which explains why the profit-structure association is weak in numerous banks. A unified approach based on the both quiet life hypothesis, structure hypothesis can be used to define the degree to which competition, and stability in the banking sector is influenced (WISE, BLINDER & GORDON, 2001). ... Relationship between quiet Life Hypothesis and efficiency structure If quiet life hypothesis holds, then it implies that, the positive profit structure association is partially offset by cost increase from poorer cost efficiency, which explains why the profit-structure association is weak in numerous banks. A unified approach based on the both quiet life hypothesis, structure hypothesis can be used to define the degree to which competition, and stability in the banking sector is influenced (WISE, BLINDER & GORDON, 2001). Structure Conduct Performance The SCP studies of banking universally can be subdivided into two primary groups according to the measure of performance (JOHNSON, 2003). The groups include the use of measure of pieces of some banking products and service in order to capture the firm’s performance. The second involves the application of profitability measure such as return on assets or equity. Nonetheless, using the piece of a single product may be misleading sue to the multi-product nature of a bank’s output. On the other hand, profit measure may be more informative, however may exhibit difficulty in comprehending and interpreting due to the complexity of the accounting procedures. Relationship between QLH, ESH and SCP The relationship between market structure and performance treated within the framework of structure-Conduct –Performance (SCP) explains well, the competitive status of a banking system. The SCP closes relates with that efficiency Hypothesis (JOHNSON, 2003). When Efficiency Hypothesis is applied in a banking sector, the hypothesis defines that a bank, which operates more efficiently than its competitors achieve higher gains that results from low operational costs.