Competition in Hong Kong's Banking Sector: A Panzar-Rosse Assessment

Abstract

This paper analyzes the evolution of competitive conditions of Hong Kong's banking industry based the Panzar-Rosse approach and a panel dataset of retail banks in Hong Kong for the period 1991-2005. Relaxation of bank regulations and bank consolidations have changed substantially the banking environment, particularly after 2001, with offsetting effects on the overall competitive condition. While the banking sector in Hong Kong is found to be highly competitive during the period 1992-2002, the empirical results also suggest that competitive condition have been maintained in subsequent years, despite significant changes in the operating environment. Empirical results also show that competitive pressure was higher among larger banks and lower among smaller banks. This suggests that while the two groups compete keenly in local retail markets, larger banks may be subjected to even stronger pressure from other competitors at regional or international levels in the corporate banking market, wealth management and other off-balance sheet activities, where they are more heavily involved than smaller banks.

Keywords: Hong Kong, Market structure, Bank competition, Panzar-Rosse model

JEL Classification: G21, L1, D40