Wednesday, November 21, 2007

Efficiency and competitiveness of banking system

A recent working paper by two IMF economists concludes "that there is a large potential to increase cost efficiency and competition in the banking system."

The paper highlights that Armenia has lagged in financial intermediation and that interest rate spreads (i.e. what banks charge borrowers and what they pay depositors) have remained high compared to other transition economies. It employs quarterly panel data obtained from the financial reports of the 21 banks of Armenia for the period 2002-2006Q3 to explore the determinants of interest rate spreads and margins.

The authors also report other findings on the effects of bank size, market concentration, and foreign ownership among others. Equally important, they provide a good overview of the state of banking in the country.

It would be good to see others replicate this study with more recent data, perhaps using annual rather than the quarterly data employed by the authors, as well as extend the analyses to address the causes of the retardation of financial intermediation.

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