Three Essays in Banking Sector of Thailand A
Total Page：16
File Type：pdf, Size：1020Kb
THREE ESSAYS IN BANKING SECTOR OF THAILAND A Dissertation Presented to the Faculty of the Graduate School of Cornell University in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy by Itthipong Mahathanaseth August 2011 © 2011 Itthipong Mahathanaseth THREE ESSAYS IN BANKING SECTOR OF THAILAND Itthipong Mahathanaseth, Ph.D. Cornell University 2011 This dissertation consists of three essays. The first essay examines the cost efficiency and production technology in the banking sector of Thailand using a stochastic frontier approach. The empirical results indicate that banks with lower Non-performing-loan- to-total-loan ratio, higher equity-to-total-asset ratio, higher liquid-asset-to-total-asset ratio, and more branches are likely to be more efficient. The second essay investigates the degree of competition in the banking industry using the new empirical industrial organization approach. The empirical results indicate that, despite the Thailand government’s efforts to increase competition in the banking industry by relaxing restrictions on entry to the market after the financial crisis, the oligopolistic degree of the biggest four banks has intensified. The third essay links the results of the first and second essays, cost efficiency and competition in the banking sector, to the transmission mechanism of monetary policy in Thailand using Vector Autoregression approach. The empirical results indicate that an unexpected tightening monetary policy shock leads to higher financial costs in the banking industry, forcing banks to compete more fiercely and operate more efficiently, significantly helping strengthen the transmission of monetary policy. Hence, the policy implication is that Thai government should exert more effort to enhance efficiency and competition in the banking sector. BIOGRAPHICAL SKETCH Itthipong Mahathanaseth was born on August 17, 1979 in a middle-class family in Ratchaburi province of Thailand. Although his parents are uneducated, they have worked tirelessly to provide their children a good education. He attended elementary school in his home town before moving to Nakornpathom province for his middle- school and high-school education. Unfortunately, he dropped out of school while studying in grade 10. He continued to study in a non-formal setting before attending Ramkamhaeng University, an open university in Thailand, from which he obtained his Bachelor of Economics with Second Class Honors in 2001. Then, he pursued his second degree in Economics at Thammasart University in Thailand from which he received the Master degree in 2004. Upon graduation, he briefly worked as a credit official at the Export-Import Bank of Thailand before becoming a lecturer in the Faculty of Economics at Kasetsart University in Thailand. He taught at Kasetsart University for 2 years before being awarded a full scholarship from the Royal Thai Government to study aboard. In August 2007, he entered Cornell University, where he completed his dissertation in July 2011. iii To my dad, mom and aunt iv ACKNKNOWLEDGEMENTS My 4 years of my graduate study at Cornell University have been an invaluable learning experience. Consequently, I would like to dedicate this dissertation to a number of people to whom I am particularly indebted. First of all, I would like to express my deepest gratitude to the chair of my dissertation committee, Professor Loren Tauer. He has consistently devoted his precious time and attention to help me with my dissertation and encouraged me when things were difficult. His invaluable advice and comments are reflected throughout the dissertation. I also gratefully acknowledge the assistance of the other members of my dissertation committee: Professor David Just and Professor Iwan Azis. Both of whom have provided crucial insights and constructive critiques that have helped greatly improve my dissertation. I would like to thank my best friends and colleagues at Cornell: Sivalai Vararuth, Thanasin Tanompongphandh, Surin Maneevitjit and, especially, Marc Rockmore. They have never hesitated to help me whenever I had difficulties and have been true friends through the journey. Even though the transition to student life in the USA was extremely difficult, I enjoyed many happy and memorable moments with them. I would also like to convey my deep gratitude to the Royal Thai Government for the full scholarship that has supported my entire graduate study at Cornell University. Without this assistance, this dissertation and my study would not have been possible. v Lastly, I would like to thank my parents who, while uneducated, know very well the importance of education. Since I was a child, they have always encouraged and supported me to push my studies as far as possible. They have shared with me my successes and failures at Cornell University and throughout my life. Their unconditional love, understanding and support no matter the distance were not only the most precious source of my aspiration but have also made my life meaningful. vi TABLE OF CONTENTS 1. Introduction and Overview 1 2. Efficiency Analysis of Thai Banks 4 2.1. Introduction 6 2.2. Literature Review 10 2.3. Methodology and Data 21 2.4. Estimation Results 33 2.5. Conclusion 54 References 57 3. Market Power versus Cost Efficiency Effect of Concentration on Competition in Thailand’s Banking Sector in the Post-Crisis Period (1998-2009) 60 3.1. Introduction 62 3.2. Literature Review 65 3.3. The Model 69 3.4. Econometric Application and Data 73 3.5. Empirical Results 77 3.6. Conclusion 83 References 86 4. The Transmission Mechanism of Monetary Policy in Thailand incorporating Commercial Banks’ Efficiency and Competition 88 4.1. Introduction 90 vii 4.2. Literature Review 94 4.3. Methodology 100 4.4. Empirical Results 114 4.5. Robustness 122 4.6. Conclusion 128 Appendix 131 References 133 5. Conclusion and Summary 136 viii LIST OF TABLES Table 2.1: Inputs and Outputs Commonly Used in the Three Different Approaches 15 Table 2.2: Summary Statistics of the Variables 27 Table 2.3: The Pooled Cost Frontier 33 Table 2.4: Mean and Standard Deviation of Cost Inefficiency 35 Table 2.5: Summary of the Tests on Cost Efficiency against the Null Hypothesis that Commercial Banks and Government-owned Banks Come from the Same Distribution 35 Table 2.6: Summary of the Tests on Total Cost Expenditure against the Null Hypothesis that Commercial Banks and Government-owned Banks Come from the Same Distribution 36 Table 2.7: The Estimated Cost Frontier for Commercial Banks 37 Table 2.8: The Estimated Cost Frontier for Government Specialized Banks 39 Table 2.9: Allen-Uzawa and Morishima Elasticities of Substitution for Commercial Banks 41 Table 2.10: Allen-Uzawa and Morishima Elasticities of Substitution for Government Banks 42 Table 2.11: Own and Cross Price Elasticities of Demands for Inputs of Commercial Banks 43 Table 2.12: Own and Cross Price Elasticities of Demands for Inputs of Government Banks 43 ix Table 2.13: Technical Change for Commercial Banks and Government Banks from 1998Q1-2009Q4 44 Table 2.14: Mean and Standard Deviation of Cost Inefficiency over the Whole Period (1998-2009) for Commercial Banks 47 Table 2.15: Mean and Standard Deviation of Cost Inefficiency for Government Banks 52 Table 3.1: List of Variables and Their Definitions 75 Table 3.2: Summary of Descriptive Statistics of Variables 77 Table 3.3: Results of Estimation (Margin and Demand equation) 78 Table 4.1: List of Variables and Their Definitions 102 Table 4.2: Optimal-lag Criteria 103 Table 4.3: The AR Root Table 104 Table 4.4: The Augmented Dickey-Fuller Test on Private Demand 106 Table 4.5: The Augmented Dickey-Fuller Test on Consumer Price Index 107 Table 4.6: The Augmented Dickey-Fuller Test on 14-day Repurchase Rate 108 Table 4.7: The Augmented Dickey-Fuller Test on Banks’ Credit 109 Table 4.8: The Augmented Dickey-Fuller Test on Banks’ Efficiency 110 Table 4.9: The Augmented Dickey-Fuller Test on Banks’ Competition 111 Table 4.10: Johansen Cointegration Test 112 Table 4.11: The VAR Estimates 115 x LIST OF FIGURES Figure 2.1: Technical Changes for Commercial Banks and Government Banks from 1998Q1-2009Q4 46 Figure 2.2: Cost Inefficiency of the Four Most Efficient Banks 51 Figure 2.3: Cost Inefficiency of the Four Least Efficient Banks 51 Figure 2.4: Cost Inefficiency of Government-owned Specialized Banks 54 Figure 3.1: Concentration Ratio of the Biggest Four Banks (CR4) 72 Figure 3.2: The Derived Lerner Index 82 Figure 3.3: The Markup 83 Figure 4.1: The AR Root Graph 105 Figure 4.2: Impulse Responses to a Shock in Repurchase Rate in the Baseline Model 120 Figure 4.3: Impulse Responses to a Shock in Repurchase Rate When Efficiency and Competition Are Exogenized. 122 Figure 4.4: Impulse Responses of VEC Model to a Shock in Repurchase Rate 123 Figure 4.5: Impulse Responses to Monetary Shock When Cholesky Decomposition Reordered 125 Figure 4.6: Impulse Responses when the Standard Deviation is Used in Place of Average efficiency 127 xi Chapter 1 Introduction and Overview The banking sector of Thailand underwent a financial meltdown during the East Asian financial crisis of 1997. Since that crisis, banks in Thailand have been subject to financial restructuring directed by the IMF and subsequent liberalization introduced by the Thai government to enhance efficiency and competition within the industry. The banking sector has recovered and is significantly reformed and continues to play important roles in the Thai economy. Banks are not only the major sources of funding for consumption and investment, but also serve as instruments in facilitating the transmission of monetary policy. Hence, it is useful to study how efficiently banks operate, how intensely they compete with each other, and ultimately how their efficiency and competition affect monetary policy transmission.