The strength of competition and market efficiency in determining bank profits

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Abstract

Paying attention to developments in market competition, banking efficiency, and profitability is very important because it will update industry information so that it can be utilized by the early warning system (EWS). Market competition is important in business, so this research is interesting for the public. This research aims to find out the impact of competition and efficiency provide positive synergy on banking profitability. The theoretical basis for problem-solving will use industrial organization thinking, which focuses on the structure conduct performance-efficiency structure hypothesis (SCP-ESH) theory (Abbas & Sheikh, 2023). The research object uses 12 samples of conventional banks in Indonesia, which are included in the top 10 categories of a set of banks during 2012–2021 (quarterly data). The analysis uses panel data regression and statistical analysis. From the research results, it was found that there is a positive synergy between market spread operational cost management efficiency and the intermediation function in banking profitability. However, company size has a negative impact on banking profitability. This research is relevant to the research of Gavurova et al. (2017), who found that the market structure of the banking industry in the European Union was still concentrated. However, market structure is negatively related to banking performance.

Keywords: Market Share, Market Competition, Efficiency, Profitability, Big Banks

Authors’ individual contribution: Conceptualization — S.S. and C.M.F.M.; Methodology — S.S. and C.M.F.M.; Validation — S.S. and C.M.F.M.; Formal Analysis — S.S. and C.M.F.M.; Investigation — S.S. and C.M.F.M.; Resources — S.S. and C.M.F.M.; Data Curation — S.S. and C.M.F.M.; Writing — Original Draft — S.S.; Writing — Review & Editing — S.S. and C.M.F.M.; Visualization — S.S.; Supervision — C.M.F.M.; Project Administration — S.S. and C.M.F.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G10, G21, G24, G31, M21

Received: 10.10.2023
Accepted: 08.07.2024
Published online: 10.07.2024

How to cite this paper: Suroso, S., & Mala, C. M. F. (2024). The strength of competition and market efficiency in determining bank profits. Risk Governance and Control: Financial Markets & Institutions, 14(3), 8–17. https://doi.org/10.22495/rgcv14i3p1