Competition in the Hungarian banking market

This paper investigates the degree of bank competition in Hungary on various submarkets. An overview of stylised facts on the market structure, pricing behaviour and entry barriers suggests that the degree of competition may be rather different in the individual submarkets. Looking at the pricing practice of Hungarian banks, a possible use of market power may be conjectured in consumer lending. By contrast, it may be presumed that competitive pricing prevails in the corporate lending market. We prove our assumption by using the Bresnahan model, which belongs to the non-structural approaches of measuring competition. We conducted our empirical investigation using different measures of output, i.e. interest-bearing assets, loans, interest-bearing liabilities and deposits, for the period between December 1996 and September 2003. In respect of consumer loans, we analysed a panel sample for a shorter time horizon, i.e. the period between March 2001 and September 2003. Based on our results, it is safe to assume that the degree of competition in the loan and deposit markets falls between perfect competition and the Cournot equilibrium. In contrast, the consumer credit market is characterised by a much lower degree of competition, i.e. between Cournot equilibrium and perfect collusion. In addition to measuring competition, we attempted to determine losses in consumer surplus caused by banks, as well as the degree of the market power (measured by the Lerner index).