Performance Efficiency of Spanish Savings Banks: an Agent-based Model of Market Concentration and Competition

Abstract

Over the past century, Spanish savings banks have undergone various transformations in reaction to national political regime changes as well as international economic events, for instance the global impacts of the Great Depression, the Spanish Civil War, Franco’s dictatorship and most recently, the global financial crisis. At each point in time, the environmental conditions triggered certain transformations in the banking market structure, which directly affected the performance of individual Spanish savings banks. The new changes were the driving force for the creation of new banking laws (formation, consolidation, restructuring and privatization) as well as new requirements in interest rate ceilings and entry barriers. This paper focuses mainly on firm efficiency of Spanish savings banks and will result in the creation of an agent-based model to simulate and capture the dynamic market behaviors of these agents. Using NetLogo as the main programming language, the model would allow flexible exploration of different policy parameters such as required reserve ratio, location restriction, and certain protective strategies against competition. It has been observed that too much regulation distorts the banking market and constrains the level of competition and efficiency in the system. However, as the bank agents adjust to market changes set forth by international, regional and national authority, too much liberalization could also lead to banking crisis due to lack of control and necessary intervention from policy makers. When the market operates between these two extremes, the model posits a positive correlation between the concentration in the Spanish banking market and the level of competition and efficiency in the system.