financial stability report - Banka Qendrore e Republikës së Kosovës

Number 3
Financial Stability Report
banks is in accordance with the notion of monopoly, monopolistic competition, or perfect
competition.
A standard regression, known as the Panzar-Rosse model, used for calculating the H-
statistic is a reduced-form revenue equation that takes the following form:
e
i
n
n
0 i i i
i1
i1
log ( TR ) log w log z error term
(1)
where, i is the index for the firm, TR represents firm’s revenues, w represents a vector of
firm’s input prices and z represents a vector of control variables that affect the firm’s
revenues. In our case, the input prices consist of the price of funds (interest
expenses/deposits), price of labor (personnel expenses/total assets) and price of physical
capital (Other operating expenses/fixed assets). The equation also includes two control
variables (loans/total assets and equity/total assets), which explain the composition of the
structure of total assets and the risk-taking attitude of the banks. The model does not
control for the bank size variable, i.e. total assets, because of the misspecification bias that
the controlling for this variable may cause. The decision not to control for bank size is based
primarily on the critique of Bikker et al. (2009), who claim that the inclusion of total assets
among the control variables causes an upward bias to the Panzar-Rosse H-statistic, since it
transforms the reduced-form revenue equation into a reduced-form price equation.
The Panzar-Rosse equation is estimated using cross-section data for each country and for
each year. The method used for the estimation is a simple Ordinary Least Square (OLS)
method, given that for some of the countries the number of cross-section observations is
small. Since the estimations from this model are going to be used as an explanatory
variable in the second stage model, we are interested on the trend of this variable rather
than on the absolute value. Hence, we ignore any estimation bias that might have resulted
from the use of the OLS method to run our regression.
8.4. The estimation of the impact of banking sector competition on risk-taking
8.4.1 Model and Data description
This section presents the empirical estimation of the impact of banking sector competition
on the loan-loss provisions for 15 CEE transition economies for the period 2002-2009. The
estimation is conducted based on an unbalanced panel of yearly data. The bank-level data
used for this estimation are sourced from the Bureau Van Dijk BankScope database,
whereas the country level data are sourced from the World Bank and the Heritage
Foundation.
The model used to estimate the relationship between competition and risk-taking is
structured as follows:
prov _ loans
hhi _ dep
4
it
it
dv _ country
10
Hstat
rgdpgrowth
it
5
0
it
1
it
it
ta
3
it
cpi
6
L.
nonint
it
2
it
rule _ law
7
L.
equity _ ta
it
4
it
fin _ freed
8
L.
nim
it
7
it
dv _ year
9
it
where, i stands for the bank and t stands for the year.
78 |