FINANCIAL STABILITY, COMPETITION AND EFFICIENCY IN LATIN AMERICAN AND CARIBBEAN BANKING

Using a sample of 272 commercial banks from fifteen Latin American countries for the period 2001-2008, we estimate cost and revenue efficiency scores, financial stability scores (Z-scores) and competition scores (Lerner indexes and Boone indicators) at the bank level. The Granger causality technique in dynamic panels is used to establish dynamic relationships among these variables. We find evidence that strongly supports the “quite life” hypothesis, while we also find partial support for causality running in the opposite direction. Moreover, the results suggest that more competition is conducive to greater financial stability (when the revenue efficiency score is used). Banks seem to achieve market power through better efficiency, leverage and earning ability. As size and complexity increase, however, agency problems and increasing risk-taking might start gaining momentum, generating inefficiency and fragility.