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Competition in Commercial Banks to Remain Adequate Despite Merger

11.26.1999

The BSP disclosed today the results of an internal study on the evolution of competitive structure in the local commercial banking industry in the 1990s using the Herfindahl-Hirschman Index or HHI. The HHI is a statistical measure of market concentration and is used in industrial economics to suggest the degree of monopoly power. (Please refer to attached summary for more details on the study results and a technical explanation of the HHI.)

The study showed that the local commercial banking industry could not really be considered an oligopolistic  market whether viewed from the point of view of deposit distribution or loan distribution in view of the relatively large number of competitors with significant individual market shares. Significantly, while recent big mergers (Equitable-PCI and BPI-Far East) increased market concentration, these were not enough to pose a threat to overall competition levels since market power remained relatively well-dispersed among remaining players.

The study also confirmed that the commercial banking industry still had enough room for more mergers and consolidations without necessarily killing off effective competition that is beneficial to depositors and borrowers.

The study noted further that the potential entry of other competitors like foreign banks in the event of further liberalization will further enhance competition. The banking industry also has to contend with increasing competition from non-bank financial intermediaries and the capital market. All of these elements will tend to ensure sufficient competition that protect public interest.

“I strongly believe that we are moving in the right policy direction in seeking to promote the merger and consolidation of our local banks at this time, in seeking to encourage the entry of strong foreign banks, and in seeking to promote the development of the domestic capital market. These are all complementary policy initiatives that will lead to a safer and more efficient banking system while providing our people a broader menu of alternatives for placing their financial savings and for sourcing much needed capital,” BSP Governor Rafael B. Buenaventura said.

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