Bank Scale of Economies, Banking Industry Concentration, and Competition Level: The Indonesian Case

Abstract

Abstrak Efisiensi sektor perbankan sebuah negara sangat dipengaruhi regulasi otoritas perbankan di negara tersebut berkaitan AbstractBanking sector efficiency in a country is directly influenced by regulations that set up by the banking authorities in that country, especially what kind of banking industry structure that regulator intend by those regulation. Indonesian Banking Architecture which encourage mergers and acquisitions of smaller banks, has a clear target that Indonesian banking industry should have a leaner industry structure with fewer number of banks but with relatively large assets, higher industry concentration higher and more tighter competition. This policy is driven by the regulator's belief that Indonesian banks has not achieved its economies of scales and competition is relatively low so that the Indonesian banking operating costs are among the highest among Asian countries. The opposite actually happened in the USA where the regulator is precisely to prevent mergers between major banks due to economies of scale bank in the United States has been exceeded. The reserach results showed the group of large banks in Indonesia is more efficient than medium and small banks and the efficiency is more due to economies of scale than caused by the concentration of the industry and the level of competition between banks.

Market concentration, diversification, and financial distress in the Indonesian banking system

“…The concentration ratio is used as the basic calculations, asset-based, revenue-based, and thirdparty funds base for measuring industry concentration. CR3 is the percentage of mastery of the three biggest companies in the industry (Wibowo, 2016). The variables commonly used are those of assets, third-party funds, and relevant credit in the banking industry.…”

The Effect of Corporate Social Responsibility, Credit Risk, and Leverage on the Financial Performance of Commercial Banks in Indonesia

“…. This policy is strengthened by the government's belief that competition is relatively low and the economies of scale in banking operations in this country cannot be fulfilled, therefore, the operational costs of Indonesian banking are relatively high compared to various other Asian countries [26].…”

Industry Concentration and Asset Quality as Determinate of Financial Performance: A Comparative Study of Indigenous and Foreign Owned Universal Banks

“…Banking sector is one which is usually characterized by high concentration of the sectors asset owned by few giant banks. Ongore, and Kusa (2013) and Wibowo (2016) opined that in order to escalate efficiency and market share, large banks tend to acquire other banks which leads to an increase in the concentration level of the banking sector. In Ghana, when the minimum capital requirement was increase from GHC 120 million approximately $23 million to GHC 400 approximately $77 million, the Bank of Ghana openly urged small banks to have consolidation plans to a merger between them to increase their capital.…”

“…The continuous occurance of this phenomenon will lead to an increase the concentration level of banking sector in the future. According to Wibowo (2016), this theoretical scaffold surface from efficient-structure paradigm which infers that, banks with large assets size will topple other banks in the race for competition, retain earnings and expand its market share so that banking industry eventually end up concentrated than before.…”