Examining Banking Industry Competitiveness: Structural Changes and Market Contestability in the Case of Indonesian Banking

Oleh :
Tri Mulyaningsih - 197907192008012009 - Fak. Ekonomi dan Bisnis

The literature highlights the importance of a competitive banking industry in boosting economic efficiency. This study estimates competition in the Indonesian banking industry by using the recent refinement of the Panzar-Rosse method that compares three specifications: price, scaled-revenue, and unscaled-revenue. It uses thirty-one years of observations to capture the policy changes in the Indonesian banking industry from deregulation and liberalization to recent banking consolidation. The estimations confirm that the Indonesian banking industry between 1980 and 2010 worked in a monopolistically competitive market. In such a market, opening the industry is crucial to create a contestable market that subsequently increases competition. The banking reforms between 1988 and 1992 lifted barriers to enter the market and improved competition through opening the industry for penetration by new entrants. A series of bank closures and mergers, and the introduction of barriers to enter the market during the 1997 crisis and the recent consolidation contributed to weaken competition in Indonesian banking.
Keywords: banking competition; non-structural approach; the Panzar-Rosse; Deregulation and Consolidation.