Competition and Market Power in the Latin American Banking Sector

The functioning of the banking sector is key for economic growth. Besides being key players in the operation of the payment system and in the transmission of monetary policy, as financial intermediaries, banks are in charge of channeling savings from households to firms through credit. Previous literature has studied the effect of financial development on economic growth but less attention has been given to analyzing how the market structure of the banking sector affects the cost of credit and, ultimately, the allocation of resources in the economy. 

The aim of this paper is threefold.  

• First, it gathers banks’ balance sheet monthly regulatory information in a consistent manner for seven Latin American countries:  Brazil, Colombia, Chile, Ecuador, Mexico, Peru, and Uruguay. This micro-level information will allow documenting the recent evolution of the market structure of the banking system in the region.
• Second, with the micro-level balance sheet information we can estimate lending markups and deposits markdowns in each country and the region as a whole and analyze the main factors explaining their evolution  over  time.
• Third, with the estimated markups and markdowns in the different countries, it is possible to study how they relate with banks’ profitability, credit spreads and the type of bank, international or domestic.