Faculty of Economics and Business Administration Publications Database

Do Government Owned Banks Trade Market Power for Slack?

Koetter, Michael
Vins, Oliver
Volume: 44
Number: 33
Pages: 4275 - 4290
ISSN-Print: 0003-6846
Link External Source: Online Version
Year: 2012
Keywords: Savings Banks, Competition, Efficiency, Quiet Life Hypothesis
Abstract: The ‘Quiet Life Hypothesis (QLH)’ posits that banks with market power have less incentives to maximize revenues and minimize cost. Especially government owned banks with a public mandate precluding profit maximization might succumb to a quiet life. We use a unified approach that simultaneously measures market power and efficiency to test the quiet life hypothesis of German savings banks. We find that average local market power declined between 1996 and 2006. Cost and profit efficiency remained constant. Nonparametric correlations are consistent with a quiet life regarding cost efficiency but not regarding profit efficiency. The quiet life on the cost side is negatively correlated with bank size, quality of loan portfolio and local per capita income. The last result indicates that the quiet cost life is therefore potentially due to benevolent excess consumption of local input factors by public savings banks.