R E S E A R CH AR T I C L E Financial sector transparency, financial crises and market power: A cross-country evidence Baah Kusi1,2 | Elikplimi Agbloyor2,3 | Agyapomaa Gyeke-Dako2 | Simplice Asongu4,5 1Department of Finance, Central University College, Accra, Ghana 2Department of Finance, University of Ghana Business School, Accra, Ghana 3University of Stellenbosch Business School, Faculty of Economic and Management Sciences, Cape Town, South Africa 4African Governance and Development Institute 5Department of Economics University of South Africa Correspondence Agyapomaa Gyeke-Dako, Department of Finance, University of Ghana Business School, P.O. Box LG 78, Accra, Ghana. Email: afuagyekedako@yahoo.co.uk Abstract The study investigates how financial sector transparency moderates the influ- ence of financial crises on bank market power across 75 economies between 2004 and 2014. Using two-step dynamic system generalized method of moments the study shows that while public sector-led financial sector trans- parency reduces bank market power, private sector-led financial sector trans- parency promotes bank market power given that private sector-led transparency gives financial cost advantage to financially sound banks to solid- ify the market power and dominance. Similarly, while financial crises reduce the market power of banks implying that during financial crises banks lose their market power, financial sector transparency promotes the negative effect of financial crises on bank market power. This implies that during financial crises, financial sector transparency whether enforced through private or pub- lic sector, boosts the weakening effect of financial crises on bank market power. These findings imply that regulators can rely on financial transparency to tame bank market power to enhance banking competitiveness. The findings and results are consistent even when country, time and continental effects are controlled for. KEYWORD S bank, financial sector transparency, market power, private sector, public sector 1 | INTRODUCTION Banking sector competitiveness which is gauged by the level of market power of banks (Cubillas & Suárez, 2018, Cubillas & Suárez, 2013; Laeven & Valencia, 2013; Laeven & Valencia, 2008a) is critical for bank manage- ment (Berger & Hannan, 1998; Mirzaei, 2019), access to external finance (Beck, Demirgüç-Kunt, & Levine, 2004; Beck, Demirgüç-Kunt, & Maksimovic, 2008), financial stability (Beck et al., 2008; Beck, De Jonghe, & Schepens, 2013; Mirzaei, 2019) and sound economic growth and development (Cetorelli & Gambera, 2001; Claessens & Laeven, 2005; Fernández, González, & Suárez, 2010). As such, there is a depth of literature on bank market power and competitiveness in the banking sector of many economies. Despite the critical nature of banking market power in shaping banking competitive- ness in an economy, there is no consensus among researchers regarding the best measure to be used to gauge competition (Northcott, 2004). Following prior studies (Carbó, Humphrey, Maudos, & Molyneux, 2009), banking competitiveness is measured using structural (Carbó et al., 2009; Bain, 1951) and non-structural (Iwata, 1974; Bresnahan, 1989; Panzar & Rosse, 1987) methods. Although the structural approach uses the con- centration and market structure indicators to gauge Received: 2 July 2020 Revised: 21 November 2020 Accepted: 23 November 2020 DOI: 10.1002/ijfe.2380 Int J Fin Econ. 2022;27:4431–4450. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons, Ltd. 4431 https://orcid.org/0000-0003-0920-9866 https://orcid.org/0000-0003-3945-5224 https://orcid.org/0000-0001-5227-5135 mailto:afuagyekedako@yahoo.co.uk http://wileyonlinelibrary.com/journal/ijfe http://crossmark.crossref.org/dialog/?doi=10.1002%2Fijfe.2380&domain=pdf&date_stamp=2020-12-20 competitiveness in the banking sector, the non-structural approach uses bank pricing ability to gauge competitive- ness in the banking sector. Although a competitive banking sector is desired to enhance innovation and growth in the sector which spurs economic growth (Carbó et al., 2009), it is impeded by information asymmetry, and searching and switching costs of financial market participants. For instance, infor- mation asymmetry creates higher switching cost for bank market participants (see Gehrig & Stenbacka, 2007; Ivashina, 2009; Ruiz-Aliseda, 2016) making banking mar- ket participants bonded and concentrated in few larger and older banks (Farrell & Klemperer, 2007); This increases the market power of such banks. Thus, infor- mation asymmetry within the financial sector makes few banks powerful in determining loan and deposit prices (price makers) and hence reduces the competitiveness in the pricing of loans and deposits. Similarly, Bouckaert, Degryse, and Provoost (2010) show that reducing switching cost leads to increased competition and social welfare. Thus, several studies (Farrell & Klemperer, 2007; Shy, 2002; Viard, 2007) report similar arguments using different industries including banking and telecommuni- cation industries. Although Bouckaert et al. (2010) advance that industries are reluctant to introducing mechanisms that reduce switching cost because it makes them powerful as they profit from such reluctance, regu- lators who are social welfare enforcers have attempted to maintain competitiveness (dampen market power) through reduction in switching cost and information asymmetry by introducing financial sector transparency reforms and regulations. One critical regulation enforced by regulators to enhance financial sector transparency in recent times especially in developing and emerging markets is credit information sharing (see Asongu, 2017; Kusi, Agbloyor, Ansah-Adu, & Gyeke-Dako, 2017; Kusi, Agbloyor, Fiador, & Osei, 2016a; Kusi, Agbloyor, Fiador, & Osei, 2016b). Thus, credit information sharing in the credit market translates into reduced information asym- metry (thereby enhancing financial sector transparency; Asongu, 2017; Kusi et al., 2017) and reduced financial cri- ses (Büyükkarabacak & Valev, 2012; Houston, Lin, Lin, & Ma, 2010). This study argues rely on prior studies (Gehrig & Stenbacka, 2007; Ivashina, 2009; Ruiz- Aliseda, 2016), that increased financial sector transpar- ency reduces the information rent fee or cost to new and young banks and enables them to compete with larger and older banks that have huge market power. Similarly, financial sector transparency frees bank clients (bor- rowers) to choose from a host of lenders because finan- cial sector transparency reduces the bank clients' searching and switching costs to new lenders. These reduce the pricing power held by large and old banks who have an informational rent advantage, leading to a more competitive bank sector and reduced market power. Despite these conceptual and intuitive reasonings, the effect of financial sector transparency on bank market power largely remains an unanswered empirical ques- tion. The positioning of this study is therefore to fill the apparent gap in the literature. Furthermore, given that financial sector transparency regulation may be enforced through the private or public sector and these two have varying features (see Miller, 2003) which may impact their operational efficiencies and effectiveness, it has become imperative to investigate which of these two improves competitiveness and reduces the market power of banks accordingly. That is, financial sector transparency enforced through the public sector is less expensive, easily accessible and may trans- late into reducing market power compared to financial sector transparency enforced through the private sector. Put differently, financial transparency through the pri- vate sector is more costly or expensive (see Miller, 2003) and hence gives banks the advantage to price their ser- vices and products a bit higher in order to pass on that cost to their clients. This therefore leads to increased pric- ing power for banks using private sector-led financial sec- tor transparency. Moreover, following studies show that credit informa- tion sharing which enhances financial sector transpar- ency reduces financial crises (Büyükkarabacak & Valev, 2012; Houston et al., 2010) and market power (Asongu & Biekpe, 2018; Asongu, Le Roux, & Tchamyou, 2019; Boateng, Asongu, Akamavi, & Tchamyou, 2018), and studies show that financial crises reduce market power (see Claessens, Klingebiel, & Laeven, 2002; Mirzaei, 2019; Shin & Chang, 2003), it is intuitive to inquire whether or not financial sector trans- parency can moderate the effect of financial crises on market power. Thus, this study argues that financial sec- tor transparency modulates the effect of financial crises on the market power of banks. The contribution of this study includes: providing international evidence on the relationship between financial sector transparency on market power of banks; offering evidence on whether pri- vate or public sector led financial sector transparency is more effective in dealing with bank market power or competitiveness and presenting evidence on how finan- cial sector transparency modulates the link between mar- ket power and financial crises. The contribution of this paper is hinged on how financial sector transparency and financial crises translate into bank competitiveness or market power in 69 economies. The rest of the study is organized as follows. After this introduction is an over- view of financial sector transparency and market power, 4432 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense followed by a literature review and insights into the methodology. The empirical results and discussion section is followed by another section on conclusions and policy implications. 2 | BRIEF OVERVIEW OF MARKET POWER AND FINANCIAL SECTOR TRANSPARENCY BETWEEN 2004 AND 2014 This section reports a brief overview of market power and financial sector transparency across 75 economies between 2004 and 2014. Market power that is used to gauge banking price competitiveness is measured with the Lerner index and obtained from the Global Financial Development database. Similarly, financial sector trans- parency is measured as private credit bureau coverage and public credit registry coverage which are credit infor- mation sharing variables that offer transparency in the credit or banking market. Thus, private credit bureau coverage and public credit registry coverage measure financial sector transparency led by the private sector and public sector, respectively. The financial sector trans- parency variables are obtained from the World Develop- ment Indicators database. Table 1 presents the yearly trends in market power and financial sector transparency across 75 economies between 2004 and 2014. It is observed that market power which is measured with the Lerner index (and indicates the ability of banks to price their loans above marginal cost) exhibits unstable trends over the years under review. Thus, the ability of banks in an economy to price loans above their marginal cost increased from 28.602% in 2004 to 29.027% in 2005 but subsequently declined from 29.027% in 2005 through to 27.128% in 2008. The decline seems to have coincided with the 2007–2009 financial crises which reinforces the argument that finan- cial crises induce regulators restructuring and sanitizing which improve competition (or reduce market power). Hence, the decline in market power during the financial crises period is not surprising. However, market power is seen to increase from 27.128% in 2008 through to 31.958% in 2014 but marginally declined in 2012. In terms of financial sector transparency, it is evident from Table 1 that financial sector transparency led by both public and private sectors has increased constantly across the years under review. Specifically, it is evident that public sector-led financial sector transparency which indicates the coverage of public credit registries improves from 3.334% in 2004 through to 11.764% in 2014 while reporting an average public sector-led financial transpar- ency of 7.189%. Thus, financial sector transparency through public credit registries coverage is averagely 7.189% of the adult population. Similarly, it is observed that private sector-led financial sector transparency which indicates the coverage of private credit bureaus improves from 15.126% in 2004 through to 28.588% in 2014 while reporting an average period private sector-led financial transparency of 22.219%. Thus, financial sector transparency through private credit bureaus coverage is averagely 22.219% of the adult population. Though an increasing trend in financial sector transparency is observed for both private and public sector-led financial transparency, the rate of increase in private sector-led financial transparency is faster and higher compared to that of the public sector-led financial transparency. Inter- estingly, while a steady increasing trend is observed for both private and public sector-led financial transparency, an unstable trend is observed for bank market power; hence bank competitiveness. 3 | LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 3.1 | Theoretical literature review The literature on market power as a gauge for competi- tion is backed by the information asymmetry theory (see Ivashina, 2009; Ruiz-Aliseda, 2016; Tian, Han, & Mi, 2019; Vives, 2019). It is argued that information asymmetry increases market power through increased TABLE 1 Yearly trends in market power, public, and private sector-led financial sector transparency Year Lerner Public Private 2004 28.602 3.334 15.126 2005 29.027 3.955 16.446 2006 28.433 4.294 18.643 2007 28.22 4.574 19.495 2008 27.128 6.388 21.025 2009 27.948 7.034 22.354 2010 29.675 8.151 24.259 2011 30.336 8.963 24.264 2012 30.2 10.18 26.695 2013 31.834 10.445 27.51 2014 31.958 11.764 28.588 Average 29.396 7.189 22.219 Note: By Authors based on data from World Development Indicators and Global Financial Development Database—Notes—Lerner-bank market power; Private-private sector led financial transparency; Public-public sector led financial sector transparency—values are in percentages (%). KUSI ET AL. 4433 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense searching, switching and information costs (see Bouckaert et al., 2010; Farrell & Klemperer, 2007; Ornelas, da Silva, & Van Doornik, 2020; Shy, 2002). Thus, bank clients face potentially higher lending rates when changing their lenders due to information asymmetry. The new lenders who do not have any credit information on the potential new client to judge the client's credit worthiness would have to charge a higher interest rate to compensate for the risk and uncertainty surrounding that potential new borrower. To avoid the extra charge on bank clients, clients are forced to stick with one bank or lender. Over time, due to information asymmetry, clients are bounded to one lender or bank indirectly due to the cost of searching and switching from one lender or bank to another; hence increasing the market power of domi- nant large and old banks or lenders. For instance, prior studies (see Allen, Clark, & Houde, 2019; Farrell & Klemperer, 2007; Syverson, 2019) posit that switching costs bind customers to vendors which make it difficult to change from one supplier to another. Furthermore, a strand of literature also highlights the links between information asymmetry and financial cri- ses leading to market power. The literature suggests that financial crises emanating from information asymmetry leads to regulator-induced restructuring and sanitization which translate into a competitive banking sector; hence reduced market power (Bandaranayake, 2019; Barrell & Karim, 2020; Claessens et al., 2002; Shin & Chang, 2003). This discussion is rooted in the “too-big-to-fail” hypothe- sis (see Baker & McArthur, 2009; Demirgüç-Kunt & Huizinga, 2013) which induces the intervention of regu- lators to sanitize the banking sector for improved compe- tition and reduced market power during crises. Contrary to this opinion, studies (Cubillas & Suárez, 2013; Laeven & Valencia, 2008b) advance that “financial cri- ses”-induced restructuring, including shutdowns, mergers and acquisitions of failed banks, may increase market power and reduce competition of surviving banks. From the above theoretical and conceptual discus- sions, it is obvious that information asymmetry may influence financial crises and market power. Following the information sharing theory (Freimer & Gordon, 1965; Stiglitz & Weiss, 1981, 1987, 1992) which states that shar- ing credit information in the credit market improves transparency in the financial market and reduces infor- mation asymmetry, the study contends that financial sec- tor transparency information sharing institutions reduce switching cost which weakens market power and improves banking competitiveness. Generally, financial sector transparency is expected to reduce bank market power and hence improve banking competitiveness. However, financial sector transparency through the private sector is expected to increase bank market power and worsen bank competitiveness (Miller, 2003). This is because private sector-led financial transparency comes with a cost which makes it costly or expensive and hence increase (decrease) market power of financially strong (weak) banks. Furthermore, the study contends that financial sector transparency may moderate the signifi- cant effect of financial crises on market power and bank competitiveness. 3.2 | Empirical literature review First, the empirical literature on transparency and mar- ket power is discussed. Second, is the literature on finan- cial crises and market power. Asongu et al. (2019) examined the role of private and public information shar- ing offices in reducing market power for financial access in 162 banks of 42 African economies between 2001 and 2011. Using two-stage least squares, generalized method of moments and quantile regression models, they find that information sharing offices which enhance transpar- ency in the financial market only reduce market power in financial access when public and private information coverages are between 3.156 and 3.3% and 1.443 and 18.4%, respectively. Thus, there are threshold points within which transparency through information sharing offices may not have their desired negative impact on the market power of banks. Similarly, Asongu and Biekpe (2018) investigated how information sharing offices are complemented by information technology infrastructure to influence the market power of banks. Using a panel data of 162 banks in 42 African economies between 2001 and 2011, they show that the interaction between internet penetration and public information sharing offices reduces market power while the interac- tion between mobile penetration and private information sharing offices increases market power, respectively. Despite the positive interactive term of mobile penetra- tion and private information sharing offices, the net effect is negative implying that technological infrastructure can complement private information sharing offices to reduce the market power of banks. Moreover, Boateng et al. (2018) investigated the role of transparency through information sharing offices on the market power of 162 banks from 42 African economies between 2001 and 2011. Using both dynamic and static estimation tech- niques, they find that transparency through private and public information sharing offices increases the market power of banks which was contrary to theoretical postu- lations. However, interacting transparency through pub- lic information sharing offices with technological infrastructure (mobile phone and internet) revealed the 4434 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense theoretical negative effect on the market power of banks, implying that information sharing offices reduce market power when complemented with technological infrastructure. In terms of financial crises and market power, Efthyvoulou and Yildirim (2014) examined market power in Central and Eastern European banking markets in the face of the 2007–2008 global financial crises and foreign ownership. They find that, while there is convergence in market power during the pre-crisis period, the onset of crises can dampen the tendency. Again, while market power appears to vary significantly with respect to own- ership features, pre-crisis period impacts are the same for all banks regardless of ownership features. More so, Cubillas and Suárez (2013) analysed the effect of banking crises on bank market power across 64 countries and 66 episodes of banking crises between 1989 and 2007. They provide bank-level and country-level evidence that after a systematic banking crisis, there is an increased level of bank market power consistent with higher levels of bank market concentration. More so, the higher the severity of the banking crises, the higher the increase in bank market power. Furthermore, whereas institutional quality induces a positive impact of banking crises on market, stricter regulations on banking activities and on new entrants into the banking market reduce the effect of the crisis on market power. Likewise, Laeven and Valencia (2013) reports on a comprehensive dataset on systematic banking crises dur- ing 1970 and 2011 across several countries. The study presents information on costs and policy responses linked with banking crises arguing that increased market power of banks is associated with periods after banking crises. Furthermore, they show that banking crises are fueled by sovereign debt and currency crises although sovereign debt crisis is more costly than banking and currency cri- ses. Furthermore, Mirzaei (2019) examined the impact of global financial crises on market power in 31 banks in the United Arab Emirates. Using the Lerner index and exploring the evolution of market power over time, it is reported that the 2007–2009 global financial crises weak- ened United Arab Emirates banks market power. Fur- thermore, bank-level market power during the crisis period has varying significant effects on market power depending on banks' characteristics. Thus, the market power of those banks that were less capitalized and effi- cient, decreased particularly significantly during the crisis period while banks with a high level of market share were also unable to preserve their power. Also, Carbo, Humphrey, Maudos and Molynex (2009) studied banking market power and competitiveness in 14 European econ- omies using different indicators of market competitive- ness. They show that the different market power or competition indicators are providing conflicting predic- tions across countries, within countries and overtime arguing that the different market power or competitive indicators measure different things. They conclude that bank pricing power suggests that banking competition in Europe may well be stronger than implied by traditional measures and analysis. In terms of information asymmetry through switching cost and market power, Egarius and Weill (2016) examined the influence of switching costs in the banking sector of the three largest Eurozone econo- mies between 2006 and 2012. Following the study of Shy (2002) in estimating switching costs, their finding suggests that a positive relationship exists between switching cost and the market power of commercial and cooperative banks, implying that switching cost which is fueled by information asymmetry increases the market power of banks. Furthermore, they observe that coopera- tive banks have lower client-based switching cost. Similar to the finding of Egarius and Weill (2016), Bouckaert et al. (2010) also show that a proportional decrease in switching cost which is induced by information asymme- try or lack of financial sector transparency increases com- petition (i.e., reduced market power) and social welfare. 3.3 | Hypothesis development From the above, although theoretical and empirical evi- dence on factors determining the market power of banks is abundant, empirical studies using financial sector transparency as a market power determinant are lim- ited. Thus, despite theoretical and empirical reasoning that financial sector transparency may reduce informa- tion asymmetry leading to reduced searching, switching and information rent costs and hence reduced market power, empirical evidence on this assertion is limited and scanty, especially in relation to cross country data. Hence, this study hypothesizes that financial sector transparency may weaken the market power of banks. However, given that financial sector transparency can be enforced or implemented either through the public and private sectors, it is further hypothesized and argued that private sector-led financial sector transpar- ency will increase the market power of banks while pub- lic sector led financial sector transparency will decrease the market power of banks. The study argues that pri- vate sector-led financial sector transparency is more costly, expensive and gives banks the advantage of pass- ing on that cost to their clients. Hence, giving banks the advantage to price their services and products higher, leading to increased pricing power for the corresponding banks. KUSI ET AL. 4435 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense H1. Public Sector Led Financial Transparency reduces the market power of banks. H2. Private Sector Led financial transparency increases the market power of banks. Again, although literature provides an indication that financial sector transparency reduces banking crises and market power, discussions on how financial sector trans- parency moderates the effect of financial crises on market power during financial crises is less apparent. Following prior studies (fill this in) hypothesizes that financial cri- ses weaken or reduce bank market power. Furthermore, the study hypothesizes that financial crises conditioned on financial sector transparency further weakens market of banks. This implies that when financial crises is inter- acted with private or public sector-led financial sector transparency, the net effect ot financial crises further reduces market power or improves banking competitive- ness. It is against this background that this study tests the hypothesis that financial sector transparency can modu- late the effect of financial crises on bank market power. Hence, the hypotheses to be tested includes: H3. Financial Crises leads to reduced market power of banks. H4. Private sector led financial transparency mitigates the negative effect of financial crises on market power. H5. Public sector led financial transparency mitigates the negative effect of financial crises on market power. 4 | METHODOLOGY AND DATA This study uses the panel data strategy to pursue the objective of establishing the effect of financial sector transparency and financial crises on the market power of banks in 69 economies between 2004 and 2014. The time period used for this study is purely based on data avail- ability of data on the variables used. The panel data strat- egy is used following Brooks (2008) and Baltagi, Song, and Koh (2003) who state that panel data are deemed to be more reliable, accurate and consistent because it com- bines the traditional time series and cross-sectional data and at the same time corrects the weaknesses of the tradi- tional time series and cross-sectional data. Hence, panel data captures both the time and entity dimensions of the dataset, making it more convincing and reliable. While data on financial sector transparency are obtained from World Development Indicators, the data on country-level bank variables are obtained from the Global Financial Development database. Panel data strategy is expressed in its general form as: Yi,t = αi + γtj + βXi,t + εi,t ð1Þ where subscripts i and t represent entity (country) and time dimensions, respectively, with i running from 1 … N and t running from 1 … T. Yit is the dependent variable, αi is scalar and constant term for all periods (t) and spe- cific to a country fixed effects (i); γt is the time fixed effects t; β is a k × 1 vector of parameters to be estimated on the independent variables; Xit is a 1 × k vector of observations on the independent variables comprising of input variables in the model which includes controlled variables and εit which is iid, is the error term. 5 | ESTIMATION STRATEGY The study uses the dynamic generalized method of moments estimator. The dynamic generalized method of moments approach is normally used where there is evi- dence of possible endogeneity (see Arellano & Bond, 1991; Arellano & Bover, 1995). This study suspects a possible endogeneity (reverse causality) between mar- ket power and financial crises. This is because while some studies show that financial crises influence the market power of banks (Claessens et al., 2002; Cubillas & Suárez, 2013; Laeven & Valencia, 2008a; Shin & Chang, 2003), other studies show that market power influences financial crises (Allen & Gale, 2004; Beck, Demirgüç-Kunt, & Levine, 2006; Berger, Klapper, & Turk-Ariss, 2009). These empirical studies therefore indi- cate probable reverse causality between market power and financial crises; hence a potential concern for endo- geneity. To resolve the underlying endogeneity concern, one needs to identify instrumental variables which are correlated with the endogenous variable but not corre- lated with the dependent variable. However, identifying a good instrument and justifying it with the literature is difficult and nearly impossible. In the light of the concern of finding appropriate instruments, this study employs the dynamic generalized method of moments as it gener- ates its own instruments (internal instruments). Specifi- cally, the two-step generalized method of moments is employed ahead of the one-step generalized method of moments because the two-step generalized method of moments controls for both heteroscedasticity and auto- correlation (see Blundell & Bond, 1998; Windmeijer, 2005). Hence, following the models of Cubillas and Suarez (Cubillas & Suárez, 2013; Cubillas & 4436 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense Suárez, 2018) and modifying it (thus including financial sector transparency variables), the two-step generalized method of moments models are estimated as: 5.1 | Effect of financial sector transparency on the market power of banks Public Sector Led Financial Transparency LERNERi,t = β0 + β1LERNERi,t−1 + β2PUBLIC −TRANSi,t + β3FINCRISESt + β4PRIVATE −CREDITi,t + β5BANK−LIQi,t + β6BANK −CAPij,t + β7GROWTHi,t + β8BZ−SCOREi,t + β9BANK−DIVi,t + β10BANK−COSTi,t + β11GDPGi,t + β12INFLi,t + εij,t ð2Þ Private Sector Led Financial Transparency LERNERi,t = β0 + β1LERNERi,t−1 + β2PRIVATE −TRANSi,t + β3FINCRISESt + β4PRIVATE −CREDITi,t + β5BANK−LIQi,t + β6BANK −CAPij,t + β7GROWTHi,t + β8BZ−SCOREi,t + β9BANK−DIVi,t + β10BANK−COSTi,t + β11GDPGi,t + β12INFLi,t + εij,t ð3Þ 5.2 | Effect of financial crises through financial sector transparency on market power Public Sector Conduit LERNERi,t = β0 + β1LERNERi,t−1 + β2PUBLIC −TRANSi,t + β3PRIVATE−TRANSi,t + β4FINCRISESt + β5 PUBLIC−TRANSi,t ×FINCRISESt½ � + β6PRIVATE−CREDITi,t + β7BANK −LIQi,t + β8BANK−CAPij,t + β9GROWTHi,t + β10Z−SCOREi,t + β11BANK−DIVi,t + β12BANK−COSTi,t + β13GDPGi,t + β14INFLi,t + εij,t ð4Þ Private Sector Conduit LERNERi,t = β0 + β1LERNERi,t−1 + β2PUBLIC −TRANSi,t + β3PRIVATE−TRANSi,t + β4FINCRISESt + β5 PRIVATE−TRANSi,t ×FINCRISESt½ � + β6PRIVATE−CREDITi,t + β7BANK −LIQi,t + β8BANK−CAPi,t + β9GROWTHi,t + β10Z−SCOREi,t + β11BANK−DIVi,t + β12BANK−COSTi,t + β13GDPGi,t + β14INFLi,t + εi,t ð5Þ In respect of the interaction (conduit model 4 and 5) between the financial sector transparency and financial crises, the study follows the arguments in Brambor, Clark, and Golder (2006) and test for the joint signifi- cance of the interactive and constitutive terms to arrive at the net effect of financial crises and financial sector trans- parency on market power of banks. For example, in Equations ((4) and ((5), the hypothesis that the effect of financial crises on bank market power is conditioned on financial sector transparency (public and private sector- led) is tested by joint coefficients, respectively. Thus, tak- ing the derivative of the interactive and constitutive terms with respect to financial crises in models 4 and 5, respectively, the net effect is obtained as: ∂LERNERi,t ∂rFINCRISESt = β4 + β5PUBLIC−TRANSi,t =0 ð6Þ ∂LERNERi,t ∂rFINCRISESt = β4 + β5PRIVATE−TRANSi,t =0 ð7Þ Hence, the nature of financial crises interacted with public and private sector-led financial transparency is examined by the summation of the coefficients (β4 + β5) and the test of significance for the joint coefficients. 6 | DEFINITION AND SELECTION OF VARIABLES 6.1 | Lerner index (LERNER) The Lerner index is employed to measure market power following the studies of Cubillas and Suarez (Cubillas & Suárez, 2013, Cubillas & Suárez, 2018; Amidu and Wolfe, 2016). The Lerner index measures the relative market power of banks by the difference between price and mar- ginal cost expressed over the price [(price-marginal cost)/ price] (Lerner, 1934). However, the marginal cost is unobservable but derived through a translog cost KUSI ET AL. 4437 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense function. The Lerner is used as the dependent variable and obtained from Global Financial Development database. 6.2 | Financial sector transparency (PUBLIC-TRANS and PRIVATE-TRANS) Financial sector transparency is measured by private and public information sharing institution coverages. Infor- mation sharing through private bureaus and public regis- tries provide valuable information that weakens the information rent advantage of large banks and dampens the switching cost bank clients face when changing lenders. Thus, information sharing through private bureaus and public registries do not only encourage new lender entrants but also grant bank clients the freedom to change or switch between lenders. This reduces the mar- ket power and dominance of banks and encourages a competitive banking environment. It is expected that financial sector transparency should reduce bank market power to induce competition in the banking space. How- ever, because financial sector transparency enforced through the private sector is costly and expensive com- pared to public sector-led financial transparency, only large and powerful banks can afford it; hence giving them (i.e., large and powerful banks) financial advantage to access client transparency information. Thus, private- sector led financial transparency is expected to increase the market dominance of large and powerful banks whereas public-sector led financial transparency is expected to decrease the market power of banks. 6.3 | Financial crises (FINCRIESE) In capturing financial crises, the 2007–2009 global financial crisis is employed. Following Goddard, Molyneux and Wilson (2009), the financial crises is captured as a dummy which assumes a value of 1 from 2007 to 2009 and 0 for other years. Cubillas and Suarez (Cubillas & Suárez, 2013; Cubillas & Suárez, 2018) argue that financial crises induce restructuring (i.e., shutdown, mergers and acquisition of failed banks), which in turn leads to greater market power and less competition of surviving banks. However, this study expects the opposite following Mirzaei (2019), Efthyvoulou and Yildirim (2014) and Shin and Chang (2003). Thus, during financial crises, there are panic with- drawals and bank panics—leading to lower confidence in the banking market and reduced banking activities. Hence, banks lose their pricing dominance and power and hence lower market power for banks. 6.4 | Private credit by deposit money banks Private credit by deposit money banks is used to mea- sure the size of the banking system. It is measured as the ratio of private credit advanced by deposit money banks to gross domestic product. From the empirical literature, size is associated with both positive (Bikker & Bos, 2005; Freixas and Rochet, 1997) and negative (Bikker, 2004; Mamatzakis, Staikouras & Koutsomanoli-Fillipaki, 2005) effects on market power. Thus, following market structures arguments (Caminal & Matutes, 2002), when the size of the bank- ing sector is made up of many small banks, a negative relationship is expected between size and market power whereas the size of the banking sector is made up of a few large banks, a positive relationship is expected between size and market power. 6.5 | Bank liquidity reserve (BANK-LIQ) Liquidity reserve is measured as bank liquidity reserve to bank assets. That is, liquidity reserves are required by regulators and hence used to measure liquidity regula- tion. Liquidity regulations are implemented to ensure banks have buffer liquidity in case of bank runs or panic. Thus, this ensures banks are liquid enough leading to a reduced ability of banks to advance more loans and hence constraints bank ability to advance loans and credit. This lowers the market power and dominance of banks. Put differently, regulations and reforms are implemented with the aim of improving banking effi- ciency and competitiveness (Bouyon, 2014) which implies reduced bank market power. From this, a negative effect is expected between liquidity regulation and market power. 6.6 | Bank capital (BANK-CAP) Bank capital measures capital adequacy which is under- stood as a ratio of required capital to risk-weighted total assets. Following the literature on capital requirement and recapitalization (Poczter, 2016; Tahir, Adegbite, & Guney, 2017), increased bank capital results into improved bank client confidence and running of banks, leading to increased banking activities. That is, the increased banking activities lead to more competition and hence reduced market power and dominance of banks. This implies that a negative effect is expected between bank capital ade- quacy and market power. 4438 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense 6.7 | Growth (GROWTH) Growth is used as a measure of opportunity for growth. It is measured as year on year growth in loans and advances. Following Cubillas and Suárez (2013), a higher growth rate in loans and advances is expected to allow banks to increase their market power. Thus, the increase in loans and advances may be an indication of demand for loans going higher leading to increased market power and dominance for banks. 6.8 | Z-Score (Z-SCORE) Z-Score is employed as a measure of stability in the bank- ing sector following prior studies (Beck et al., 2013; Hous- ton et al., 2010; Laeven and Levine, 2009). It is computed as the capital to asset ratio plus return on assets divided by the standard deviation of return on assets. However, given that the resultant Z-Score value is positively skewed, it is logged to be normalized. It is anticipated that improved stability will lead to increased market power (see Cubillas & Suárez, 2013). Thus, stability strengthens the financial muscle of banks, promotes the confidence of bank clients in the banking sector and hence gives banks the edge to price higher thus leading to higher levels of market power. 6.9 | Bank diversification (BANK-DIV) Bank diversification according to Cubillas and Suárez (2013) can be used to proxy for specialization as it is the direct opposite of diversification. Measured as non-interest income to total income, a lower value implies high specialization leading to increased bank market power. Thus, as banks specialize, they develop core competence and specialized features which make them powerful in setting prices; hence a negative relationship between diversification and bank market power. However, Nguyen, Skully, and Perera (2012) advance that banks in an attempt to maintain and grow their power in a concentrated market use non-interest income to leverage their market power and dominance; hence a positive relationship between non-interest income and market power. Following the above discussion, non- interest income could either have a positive or negative effect on bank market power. 6.10 | Bank cost (BANK-COST) Bank cost measures bank efficiency and is proxied as operating expenses to total income. Following the efficiency-structure hypothesis, more efficient banks have superior management or production technologies leading to lower overhead costs and higher profits (see DeYoung & Rice, 2004). These efficient banks tend to have large market shares resulting in greater market power (see Berger, 1995). Thus, given the measure of bank efficiency (which is actually an inefficiency mea- sure), a negative relationship is expected. 6.11 | Inflation (INFL) Inflation measures the degree of volatilities in an econ- omy. The impact of inflation on market power is not a clear one a priori. Increased inflation levels oblige banks to demand a higher risk premium (Angelini & Cetorelli, 2003). Following Chirinko and Fazzari (2000), powerful and dominant banks have the ability to pass on inflation to the clients; hence a positive relation between inflation and market power. Similarly, in markets where banks have lower market power, the ability to transfer inflation to the client will be low and hence a negative relationship between inflation and market power. Thus, the relationship between inflation and market power is not straight forward. 6.12 | Gross domestic product growth (GDPG) Gross domestic product growth is employed as a macroeco- nomic variable in addition to inflation as a determinant of market power. Gross domestic product is measured as year on year changes in gross domestic product. Gross domestic product growth is an indication for enhancement in busi- ness opportunities and improved citizenry welfare. Follow- ing an improvement in welfare, banks lose their pricing power because citizenry are well to do given the improve- ment in welfare and hence relies less on banks for support. This weakens the pricing power and dominance of banks (Angelini & Cetorelli, 2003). All the variables employed in this study are summa- rized and reported in Table 2 for easy reference by readers. 7 | EMPIRICAL RESULTS Table 3 presents the summary statistics of the variables used in this study. The table captures data on the vari- ables across 75 economies in Europe, Asia, America and Africa (Appendix). From the table, the average Lerner index which measures the relative market power of KUSI ET AL. 4439 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense banks in the 75 countries used in this study is 26.48% implying that banks in the 75 economies are able to price the services and products 26.48% above their marginal cost. Compared to the average market power of 38.44% in 64 economies used in the study of Cubillas and Suárez (2013), the mean market power of the present study is lower. Public and Private sector-led financial transparencies are on the average 8.065 and 23.133% of TABLE 2 Summary and description of variables Variables Measurements Indicators Expected Signs LERNER [Price-marginal cost]/Price Market power PRIVATE- TRANS Percentage of Adult Population covered by private bureaus Financial Sector Transparency led by the private sector [+] PUBLIC-TRANS Percentage of Adult Population covered by public registries Financial Sector Transparency led by Public sector [−] FINCRISES Dummy which assumes a value of 1 for years 2007, 2008 and 2009 and 0 otherwise 2007–2009 Financial Crises [+/−] PRIVATE- CREDIT Private credit advance by deposit money banks/gross domestic product Size of Banking Sector [−/+] BANK-LIQ Liquidity Reserves/Bank Assets Bank Liquidity [−] BANK-COST Operational cost/total income Bank Efficiency [−/+] GROWTH Changes in loans and advances/total loans and advances Growth Potentials [+] Z-SCORE [capital-asset + ROA]/Standard deviation ROA Bank Stability [+] BANK-DIV Non-interest income/total income Bank Diversification [−/+] INFL Consumer Price Index Economic Stability [−/+] GDPG [Current GDP-Previous GDP]/Previous GDP Economic Growth [−] TABLE 3 Summary statisticsVariable Obs Mean SD Min Max SWILK VIF LERNER 2,353 26.48 15.694 0 100 13.063*** — PUBLIC-TRANS 2,418 8.065 17.222 0 100 15.476*** 1.111 PRIVATE-TRANS 2,418 23.133 34.134 0 100 12.707*** 1.392 FINCRISES 5,778 .074 .262 0 1 6.870*** 1.145 PRIVATE-CREDIT 4,628 44.036 44.764 0 100 16.846*** 1.930 BANK-LIQ 2,263 22.298 23.785 .205 100 15.670*** 1.428 BANK-CAP 2,023 16.572 5.418 1.755 48.6 12.504*** 1.268 GROWTH 4,425 5.001 21.374 −98.417 63.343 18.015*** 1.178 ZSCORE 3,716 2.376 .727 −4.11 4.557 12.736*** 1.159 BANK-DIV 3,325 38.878 14.977 1.425 93.701 9.867*** 1.377 BANK-COST 3,291 56.37 14.72 19.988 100 4.091*** 1.340 GDPG 5,334 3.592 5.97 −64.047 88.958 16.988*** 1.236 INFL 4,498 7.39 11.346 −18.109 98.773 17.968*** 1.238 Note: LERNER-bank market power; PUBLIC-TRANS-financial sector transparency led by public sector; PRIVATE-TRANS-financial sector transparency led by private sector; FINCRISES-2007-2009 financial crises; PRIVATE-CREDIT-size of banking system; BANK-LIQ-liquidity requirement; BANK-CAP-bank capital requirement; GROWTH-growth potential; ZSCORE-bank stability; BANK-DIV-bank diversification; BANK- COST-bank efficiency; NONPERFOM-credit risk; INFL-inflation; GDPGROWTH-economic growth; INFL- economic stability. ***p < .01—values are in percentages. 4440 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense T A B L E 4 P ea rs on 's co rr el at io n V ar ia bl es (1 ) (2 ) (3 ) (4 ) (5 ) (6 ) (7 ) (8 ) (9 ) (1 0) (1 1) (1 2) (1 3) (1 ) L E R N E R 1. 00 0 (2 ) PU B L IC -T R A N S − 0. 06 9 * 1. 00 0 (3 ) P R IV A T -T R A N S − 0. 12 3* 0. 00 6 1. 00 0 (4 ) F IN C R IS E S 0. 03 3 − 0. 08 0 * − 0. 05 0* 1. 00 0 (5 ) PR IV A T -C R E D IT − 0. 08 2* 0. 10 0* 0. 37 0* 0. 05 1* 1. 00 0 (6 ) B A N K -L IQ 0. 03 4 − 0. 02 8 − 0. 16 7 * − 0. 00 1 − 0. 34 4* 1. 00 0 (7 ) B A N K -C A P 0. 19 2* − 0. 12 4* − 0. 21 2* − 0. 06 7* − 0. 30 0* 0. 21 2* 1. 00 0 (8 ) G R O W T H 0. 07 6 * − 0. 07 0* − 0. 12 8* 0. 07 1* − 0. 00 5 0. 07 3* − 0. 00 5 1. 00 0 (9 ) L N Z SC O R E 0. 20 5* 0. 04 8* − 0. 05 5* − 0. 00 4 0. 09 3* − 0. 05 3* − 0. 01 3 − 0. 11 9* 1. 00 0 (1 0) B A N K -D IV − 0. 12 9* − 0. 13 3* − 0. 02 4 0. 01 4 − 0. 05 4* 0. 17 8* 0. 11 6* − 0. 00 8 − 0. 16 5* 1. 00 0 (1 1) B A N K -C O ST − 0. 44 7 * 0. 01 3 0. 06 4* − 0. 06 1* − 0. 05 4* − 0. 05 5* − 0. 07 7* − 0. 04 2* − 0. 08 6* 0. 15 5* 1. 00 0 (1 2) G D PG 0. 19 3* − 0. 06 2* − 0. 12 7* 0. 06 7* − 0. 12 0* 0. 03 4 0. 05 1* − 0. 08 7* − 0. 01 6 0. 04 3* − 0. 11 4* 1. 00 0 (1 3) IN F L − 0. 04 5 * − 0. 06 9* − 0. 19 0* 0. 02 2 − 0. 25 9* 0. 20 2* 0. 07 9* − 0. 00 2 − 0. 14 9* 0. 11 0* 0. 06 3* − 0. 01 1 1. 00 0 N ot e: L E R N E R -b an k m ar ke t po w er ;P U B L IC -T R A N S- fi n an ci al se ct or tr an sp ar en cy le d by pu bl ic se ct or ;P R IV A T E -T R A N S- fi n an ci al se ct or tr an sp ar en cy le d by pr iv at e se ct or ;F IN C R IS E S- 20 07 -2 00 9 fi n an ci al cr is es ; PR IV A T E -C R E D IT -s iz e of ba n ki n g sy st em ;B A N K -L IQ -l iq ui di ty re qu ir em en t; B A N K -C A P- ba n k ca pi ta lr eq ui re m en t; G R O W T H -g ro w th po te n ti al ;Z SC O R E -b an k st ab il it y; B A N K -D IV -b an k di ve rs if ic at io n ;B A N K - C O ST -b an k ef fi ci en cy ;N O N PE R F O M -c re di t ri sk ;I N F L -i n fl at io n ;G D P G R O W T H -e co n om ic gr ow th ;I N F L -e co n om ic st ab il it y. * p < .1 — va lu es ar e in pe rc en ta ge s. KUSI ET AL. 4441 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense TABLE 5 Effect of transparency regulation on bank market power Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Variables Public-Trans Private-Trans Both Public-Trans Private-Trans Both LERNER(−1) 1.116*** 1.148*** 1.159*** 1.123*** 1.161*** 1.166*** (0.102) (0.110) (0.111) (0.102) (0.113) (0.113) PUBLIC-TRANS −0.0321** −0.0290** −0.0337*** −0.0310** (0.0124) (0.0142) (0.0124) (0.0146) PRIVATE-TRANS 0.0229** 0.0223** 0.0241** 0.0227** (0.00984) (0.00982) (0.0101) (0.0102) FINCRISES −1.472* −1.353* −1.355* −1.434* −1.311* −1.318* (0.769) (0.748) (0.751) (0.768) (0.742) (0.746) PRIVATE-CREDIT −0.0103 −0.0164* −0.0163* −0.00886 −0.0155 −0.0152 (0.00752) (0.00978) (0.00951) (0.00790) (0.0101) (0.00969) BANK-LIQ −0.00655 −0.0166 −0.0116 −0.0124 −0.0181 −0.0140 (0.0371) (0.0355) (0.0368) (0.0389) (0.0363) (0.0377) BANK-CAP −0.0891 −0.0825 −0.0902 −0.0549 −0.0578 −0.0664 (0.0566) (0.0555) (0.0560) (0.0648) (0.0636) (0.0632) GROWTH −4.055 −2.889 −3.416 −4.257 −3.362 −3.733 (2.927) (3.091) (3.047) (3.090) (3.372) (3.268) Z-SCORE −0.127 −0.171 −0.223 −0.395 −0.342 −0.399 (0.463) (0.457) (0.472) (0.510) (0.492) (0.504) BANK-DIV 0.0955** 0.0958** 0.0914** 0.0948** 0.0944** 0.0910** (0.0432) (0.0407) (0.0407) (0.0430) (0.0401) (0.0397) BANK-COST −0.0493 −0.0479 −0.0451 −0.0687 −0.0551 −0.0566 (0.0600) (0.0606) (0.0609) (0.0574) (0.0606) (0.0610) GDPG −0.171 −0.154 −0.170* −0.201* −0.185* −0.195* (0.103) (0.0970) (0.0989) (0.111) (0.106) (0.106) INFL −0.0292 −0.0248 −0.0237 −0.0367 −0.0310 −0.0303 (0.0516) (0.0563) (0.0546) (0.0503) (0.0575) (0.0552) Constant 0.503 −1.402 −1.165 6.142 2.565 2.856 (6.044) (6.043) (6.108) (5.708) (6.326) (6.356) Country Effects No No No Yes Yes Yes Continental Effects No No No Yes Yes Yes Year Effects No No No Yes Yes Yes F-Stats 67.12*** 52.43*** 47.60*** 66.68*** 53.64*** 50.94*** Observations 533 533 533 533 533 533 Number of countries 75 75 75 75 75 75 Instruments 18 16 17 21 19 20 AR (1) −1.76* −1.79* −1.81* −1.80* −1.84* −1.85* AR (2) 0.07 0.05 0.07 0.06 0.05 0.07 Sargan 26.48*** 20.69*** 20.53*** 26.60*** 20.78*** 20.59*** Hansen 4.35 2.21 2.10 5.08 2.51 2.40 ***p < .01; **p < .05; *p < .1—values are in percentages. Note: LERNER-bank market power; PUBLIC-TRANS-financial sector transparency led by the public sector; PRIVATE-TRANS-financial sector transparency led by the private sector; FINCRISES-2007-2009 financial crises; PRIVATE-CREDIT-size of the banking system; BANK-LIQ-liquidity requirement; BANK-CAP- bank capital requirement; GROWTH-growth potential; ZSCORE-bank stability; BANK-DIV-bank diversification; BANK-COST-bank efficiency; NONPERFOM- credit risk; INFL-inflation. 4442 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense the adult population in the sample countries. This implies that public and private sector led credit informa- tion on bank client that is used by financial institutions to improve transparency in the financial market covers, respectively, 8.1 and 23.1% of adults in the sampled coun- tries. Financial crises which captures the 2007–2009 global financial crises covers about 7.4% of the dataset sample. Credit advanced to the private sector by banks and bank liquidity reserve requirements are on the average 44.036% and 22.298% of gross domestic product and bank assets, respectively. Bank required capital which mea- sures capital adequacy for absorbing shocks is averagely 16.572% of risk-adjusted assets. Compared to the average capital adequacy of 35.43% in 17 European economies used in the study of Cubillas and Suárez (2018), the aver- age capital adequacy of 16.572% in this present study is lower. Growth potential in this current study is averagely 5% while the growth potential of 19.430% is reported in Cubillas and Suárez (2013). This is an indication that growth potentials in the 75 economies used in the study are lower compared to the growth potential of the 64 economies used in Cubillas and Suárez (2013). Although the Z-Score which measures banking stability is reported to have a mean logged value of 2.376, the logged mean values of 1.0504 and 1.3181 reported in Cubillas and Suárez (2013) and Cubillas and Suárez (2018) respectively, implying that banking stability in the 75 economies used in this study is higher compared to the economies in Cubillas and Suárez (2013) and Cubillas and Suárez (2018). Bank diversification and efficiency are reported to be 38.878% and 56.37%, respectively. These imply that while banks in the 75 economies averagely earn 38.88% of the revenue from non-traditional revenue sources, about 56.37% of total revenue goes into settling operating expenses. In terms of macroeconomic indicators, inflation and gross domestic product growth are averagely reported to be 7.39% and 3.592%, respectively. Given the values in the summary statistics table (Table 3), there is no evidence of outliers (as the variables were within their expected minimum and maximum ranges); hence no potential influence of outliers to bias the reliability, accuracy and consistency of the results and findings. Again, the normality of each of the vari- ables is confirmed by the Shapiro Wilk normality test shown in Table 3. In Table 4 however, multicollinearity is examined. Following the rule of thumb of 0.5 threshold of multicollinearity (see Obrien, 2007; Wichers, 1975; Kumar, 1975), there is no evidence of multicollinearity. This is further confirmed by the Variance Inflation Factor (VIF) reported in Table 3 as none of the VIF values exceeded the maximum threshold of 10 (see O'brien, 2007). The main results of the study are reported in Tables 5 and 6. While Table 5 reports on the direct effect of finan- cial sector transparency on the market power of banks, Table 6 reports on the conduit effect of financial crises through financial sector transparency on market power. The reports cover 75 economies between 2004 and 2014. In Table 5, six (6) models are reported. While all six (6) models present the effect of private and public sector led financial transparency on bank market power in 75 economies, Models 1–3 fail to control for technological changes, country and continental differences while Models 4–6 control for technological changes, country and continental differences. Similarly in Table 6 which presents the results on the conduit effect of financial cri- ses through financial sector transparency on bank market power, Models 7 and 8 fail to control for technological changes, country and continental differences while Models 9 and 10 control for technological changes, coun- try and continental differences. From the generalized method of moments results in Table 5, the study finds a positive and significant effect of previous year bank market power on current year bank market power implying persistency in bank market power. Thus, previous year bank market power positively reinforces the current year's market power. In terms of financial sector transparency, both significant positive and negative relationships are established on bank mar- ket power in all the models (Models 1–6 in Table 5 and Models 7–10 in Table 6). Although a negative relation- ship between public sector led financial transparency and bank market power is reported implying that public sec- tor led financial transparency erodes the market power of banks, a positive relationship between private sector-led financial transparency and bank market power is reported implying that private sector-led financial trans- parency promotes the market power of banks. Interest- ingly, both the positive and negative results can be explained by the literature. First, financial sector trans- parency (public sector led) through credit information sharing reduces bank market power because “public sec- tor”-driven financial transparency is associated with little charges and therefore, erodes the searching, switching and information rent costs which make banks powerful in pricing their services above marginal cost. Hence, pub- lic sector led financial sector transparency reduces the market power of banks. Second, financial sector transpar- ency (private sector-led) through credit information shar- ing promotes bank market power because private sector- led financial sector transparency comes with costly or expensive charges which banks pass on to their clients (Maudos & De Guevara, 2004; Tarus, Chekol, & Mutwol, 2012) by marking-up their prices, leading to increased bank market power. Furthermore, one may KUSI ET AL. 4443 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense TABLE 6 Effect of transparency regulation and financial crises on bank market power Model 7 Model 8 Model 9 Model 10 Variables Private-Crises Public-Crises Private-Crises Public-Crises LERNER(−1) 1.161*** 1.114*** 1.167*** 1.121*** (0.109) (0.0953) (0.111) (0.0960) PUBLIC-TRANS −0.0290** −0.0418** −0.0311** −0.0424** (0.0145) (0.0172) (0.0149) (0.0168) PRIVATE-TRANS 0.0238** 0.0186* 0.0246** 0.0189* (0.0111) (0.0102) (0.0114) (0.0101) FINCRISES −0.965 −2.926*** −0.850 −2.895*** (1.302) (0.859) (1.304) (0.872) 1.FINCRISES×C.PUBLIC-TRANS 0.188** 0.186** (0.0896) (0.0916) 1.FINCRISES×C.PRIVATE-TRANS −0.0109 −0.0133 (0.0197) (0.0197) PRIVATE-CREDIT −0.0157* −0.0143 −0.0144 −0.0133 (0.00912) (0.0102) (0.00929) (0.0102) BANK-LIQ −0.0107 −0.0158 −0.0126 −0.0189 (0.0367) (0.0373) (0.0378) (0.0394) BANK-CAP −0.0923 −0.0713 −0.0693 −0.0462 (0.0561) (0.0562) (0.0637) (0.0636) GROWTH −3.372 −3.180 −3.648 −3.487 (3.179) (2.886) (3.397) (3.098) Z-SCORE −0.228 −0.0589 −0.401 −0.270 (0.476) (0.426) (0.512) (0.465) BANK-DIV 0.0881** 0.0985** 0.0869** 0.0976** (0.0406) (0.0427) (0.0392) (0.0429) BANK-COST −0.0439 −0.0550 −0.0549 −0.0696 (0.0604) (0.0565) (0.0602) (0.0549) GDPG −0.165* −0.149 −0.189* −0.175 (0.0975) (0.102) (0.105) (0.109) INFL −0.0247 −0.0164 −0.0310 −0.0214 (0.0538) (0.0484) (0.0546) (0.0482) Constant −1.240 −0.0776 2.707 4.686 (6.064) (5.850) (6.332) (5.795) Country Effects No No Yes Yes Continental Effects No No Yes Yes Year Effects No No Yes Yes F-Stats 41.43*** 47.49*** 44.45*** 54.44*** Observations 533 533 533 533 Number of countries 75 75 75 75 Instruments 18 20 21 23 AR (1) −1.81* −1.78* −1.85* −1.82* AR (2) 0.11 0.41 0.11 0.40 Sargan 19.88*** 26.81*** 19.90*** 26.95*** 4444 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense argue that because of the cost of private sector-led finan- cial transparency, fewer banks are able to access this ser- vice and this gives those who are able to access the service significant market power especially in economies where bank are required by law to access or use financial sector transparency institutions in the dealings. Again, it is observed in both Tables 5 and 6 that finan- cial crises negatively and significantly affect bank market power across almost all 10 models estimated. This finding indicates that during financial crises periods, banks lose the market power in pricing their services and products overly above their marginal cost. This supports existing literature that argue that during financial crises, there are bank panic withdrawals—leading to lower confidence in the banking market and reduced banking activities (see Efthyvoulou & Yildirim, 2014; Mirzaei, 2019; Shin & Chang, 2003). This makes banks lose their pricing domi- nance and power and hence lowers bank market power. Similarly in Table 6 where the study interacts finan- cial crises with financial sector transparency on bank market power, it is observed that the interactive term between financial crises and private-led financial trans- parency (Models 8 and 10) and financial crises and public led financial transparency (Models 7 and 9) are nega- tively insignificant and positively significant related to bank market power, respectively. However, following Brambor et al. (2006), the study obtains the effect and sig- nificance of the interaction term by computing the net effects as illustrated in Equations (6) and (7). As shown in Table 6, the net effect of financial crises through pri- vate and public sector-led financial sector transparency are negative implying that in an average private sector and public sector-led transparent economy, the reducing effect of financial crises on market power is propelled and weakened, respectively. Thus, while public sector-led financial transparency dampens the reducing effect of financial crises on bank market power, private sector-led financial transparency promotes the reducing effect of financial crises on bank market power. The study argues that because of the cost of private sector-led financial transparency, it reinforces the nexus between financial crises and market power. Similarly, because public sector-led transparency does not give a financial advan- tage to financially sound banks, it dampens the reducing effect of financial creises on market power. On control variables, private credit by banks, bank income diversification and gross domestic product growth rate are reported to be significant determinants of bank market power across the 75 economies used in this study. Specifically, the size of the banking system repre- sented as private credit advanced by banks reduces the market power of banks. Following the empirical litera- ture (Bikker, 2004; Mamatzakis, Staikouras & Koutsomanoli-Fillipaki, 2005), an increase in the size of the banking system in the form of new entrants reduces the market power of the existing banks. Hence, this find- ing is consistent with prior studies. However, the nega- tive effect of diversification is explained following Cubillas and Suárez (2013) who argue that diversifica- tion, unlike specialization, weakens the development of core competence and expert experience which give banks the ability to dictate prices. Hence, the negative relation- ship between diversification and market power is rooted in the literature. Finally, the gross domestic product growth rate reduces bank market power significantly. That is, banks lose their pricing power when there is an improvement in the welfare of the citizenry. This is because the citizenry rely less on banking institutions for financial assistance during good economic times. This weakens the pricing power and dominance of banks (Angelini & Cetorelli, 2003). 8 | ROBUSTNESS AND DIAGNOSTIC CHECKS To ensure consistency, reliability, accuracy and efficiency in the results and findings of this study, a number of standard econometric processes and procedures are observed. Using the summary statistics table, the study screens for outliers TABLE 6 (Continued) Model 7 Model 8 Model 9 Model 10 Variables Private-Crises Public-Crises Private-Crises Public-Crises Hansen 2.13 4.37 2.46 4.91 Net Effect −1.390* −1.781*** −1.372* −1.759*** Note: LERNER-bank market power; PUBLIC-TRANS-financial sector transparency led by public sector; PRIVATE-TRANS-financial sector transparency led by private sector; FINCRISES-2007-2009 financial crises; PRIVATE-CREDIT-size of banking system; BANK-LIQ-liquidity requirement; BANK-CAP-bank capital requirement; GROWTH-growth potential; ZSCORE-bank stability; BANK-DIV-bank diversification; BANK-COST-bank efficiency; NONPERFOM-credit risk; INFL-inflation. ***p < .01; **p < .05; *p < .1—values are in percentages. KUSI ET AL. 4445 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense and no evidence of outliers which have the potential to bias the results are observed from the shapiro Wilk normality result. Again, multicollinearity is screened for using Pearson's correlation and the variance inflation factor (Obrien, 2007; Wichers, 1975; Kumar, 1975). That is, no evi- dence of multicollinearity is observed given that none of the paired correlations exceeded the rule of thumb threshold of 0.5. Moreover, by employing the two-step dynamic system generalized methods of moments, the study is able to control for endogeneity, autocorrelation and heteroscedasticity. These ensure the results and findings are reliable, consistent and accurate. Similarly, the instruments, F-Statistics, Sargan and Hansen values are evidence of validity and reliability of the results. Finally, the results are consistent across all the models and even when the study controls for year and tech- nological, country and continental effects. Thus, the results are reliable and valid. 9 | CONCLUSIONS, POLICY IMPLICATIONS AND RECOMMENDATIONS In this study, the role of financial sector transparency in modulating the effect of financial crises on bank market power is examined across 75 economies in Europe, Amer- ica, Asia and Africa. Motivated by the lack of empirical studies on the interrelations between financial sector transparency and financial crises on bank market power, this study employs country-level data from World Devel- opment and Global Financial Development databases between 2004 and 2014 to examine the underlying nex- uses. This study employs two-step dynamic system gener- alized method of moments to provide evidence on these interrelations. The key findings are reported as follows. First, it is observed that public sector-led financial sector transpar- ency has a negative effect on bank market power imply- ing that financial sector transparency enforced through the public sector is effective in reducing the pricing power of banks. This finding conforms to both theoretical and empirical literature. Contrary to the first finding, pri- vate sector-led financial sector transparency has a posi- tive effect on bank market power implying that financial sector transparency enforced through the private sector promotes the pricing power of banks which is contrary to the theoretical literature. However, this positive relation- ship is not surprising and can be attributed to the costly and expensive nature of enforcing financial sector trans- parency through the private sector. Thus, banks pass on the cost of financial sector transparency to their clients; hence increasing the price of banking services and prod- ucts which increases their market power. Third, it is reported that financial crises represented as 2007–2009 global financial crises reduced the market power of banks implying that during financial crises, banks lose their mar- ket power especially pricing power because the confidence of market players decline leading to less banking and finan- cial transaction; hence loss in market power. Fourth, the interactive term of financial crises and financial sector transparency on bank market power has a net negative effect on bank market power implying that during financial crises, financial sector transparency whether enforced through private or public sector boosts the weakening effect of financial crises on bank market power. Finally, on the control variables, the size of the banking system, bank diversification and gross domestic product growth rate also have significant effects on bank market power. These findings have policy implications and recom- mendations for regulators and bank managements. First, while regulators are assured of relying on public sector- led financial sector transparency as a tool for taming bank market power to enhance banking competitiveness, regulators must have a look at private sector-led financial sector transparency because it does not yield the desired results on bank market power. Possibly, the regulator may have incorporate some of the information in private databases that do not exist in public databases into the public database that do not exist in public databases into the public database. This will reduce the advantage of private databases. I think it is an easier and more work- able solution. Also, regulators may have to pay attention to the structure and cost setting features of private sector- led financial sector transparency. As a future research direction, researchers may have to investigate further the effect of financial sector transparency on stability and welfare of the citizenry. Also, it will be worthwhile for researchers to assess if the established findings withstand empirical scrutiny when bank-level data is used. DATA AVAILABILITY STATEMENT The data that support the findings of this study are openly available in World Development Indicators, Global Financial Development and World Governance Indicator databases at the following URL respectively: https://databank.worldbank.org/source/world- development-indicators; https://databank.worldbank. org/reports.aspx?source=global-financial-development; https://databank.worldbank.org/source/worldwide- governance-indicators. ORCID Baah Kusi https://orcid.org/0000-0003-0920-9866 Elikplimi Agbloyor https://orcid.org/0000-0003-3945- 5224 Simplice Asongu https://orcid.org/0000-0001-5227-5135 4446 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense https://databank.worldbank.org/source/world-development-indicators https://databank.worldbank.org/source/world-development-indicators https://databank.worldbank.org/reports.aspx?source=global-financial-development https://databank.worldbank.org/reports.aspx?source=global-financial-development https://databank.worldbank.org/source/worldwide-governance-indicators https://databank.worldbank.org/source/worldwide-governance-indicators https://orcid.org/0000-0003-0920-9866 https://orcid.org/0000-0003-0920-9866 https://orcid.org/0000-0003-3945-5224 https://orcid.org/0000-0003-3945-5224 https://orcid.org/0000-0003-3945-5224 https://orcid.org/0000-0001-5227-5135 https://orcid.org/0000-0001-5227-5135 REFERENCES Allen, J., Clark, R., & Houde, J. F. (2019). 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Int J Fin Econ. 2022;27: 4431–4450. https://doi.org/10.1002/ijfe.2380 KUSI ET AL. 4449 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense https://doi.org/10.1002/ijfe.2380 Afghanistan Rwanda Costa Rica Kuwait Croatia Albania Senegal Czech Republic Kyrgyz Republic Iceland Algeria South Africa Dominican Republic Madagascar Serbia Armenia Sweden Ecuador Malaysia Sierra Leone Bangladesh Tanzania El Salvador Mexico Turkey Belarus Tunisia Georgia Morocco United States Bolivia Uganda Ghana Nigeria Belgium Bosnia and Herzegovina Ukraine Guatemala Norway Botswana Brazil United Arab Emirates Honduras Oman Burkina Faso Bulgaria Uruguay Hungary Panama Angola Burundi Venezuela, RB Indonesia Peru Sweden Cambodia Zambia Israel Philippines Turkey Cameroon Azerbaijan Japan Poland United States Canada Chile Kazakhstan Qatar Uruguay Colombia China Korea, Rep. Russian Tunisia APPENDIX: LIST OF COUNTRIES EMPLOYED IN THE STUDY 4450 KUSI ET AL. 10991158, 2022, 4, D ow nloaded from https://onlinelibrary.w iley.com /doi/10.1002/ijfe.2380 by U niversity of G hana - A ccra, W iley O nline L ibrary on [30/04/2024]. See the T erm s and C onditions (https://onlinelibrary.w iley.com /term s-and-conditions) on W iley O nline L ibrary for rules of use; O A articles are governed by the applicable C reative C om m ons L icense Financial sector transparency, financial crises and market power: A cross-country evidence 1 INTRODUCTION 2 BRIEF OVERVIEW OF MARKET POWER AND FINANCIAL SECTOR TRANSPARENCY BETWEEN 2004 AND 2014 3 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 3.1 Theoretical literature review 3.2 Empirical literature review 3.3 Hypothesis development 4 METHODOLOGY AND DATA 5 ESTIMATION STRATEGY 5.1 Effect of financial sector transparency on the market power of banks 5.2 Effect of financial crises through financial sector transparency on market power 6 DEFINITION AND SELECTION OF VARIABLES 6.1 Lerner index (LERNER) 6.2 Financial sector transparency (PUBLIC-TRANS and PRIVATE-TRANS) 6.3 Financial crises (FINCRIESE) 6.4 Private credit by deposit money banks 6.5 Bank liquidity reserve (BANK-LIQ) 6.6 Bank capital (BANK-CAP) 6.7 Growth (GROWTH) 6.8 Z-Score (Z-SCORE) 6.9 Bank diversification (BANK-DIV) 6.10 Bank cost (BANK-COST) 6.11 Inflation (INFL) 6.12 Gross domestic product growth (GDPG) 7 EMPIRICAL RESULTS 8 ROBUSTNESS AND DIAGNOSTIC CHECKS 9 CONCLUSIONS, POLICY IMPLICATIONS AND RECOMMENDATIONS DATA AVAILABILITY STATEMENT REFERENCES