EXAMINING OPERATING PERFORMANCE IN AN INSULAR BANK OLIGOPOLY THE CASE OF PUERTO RICO

Abstract

This study examines the operating efficiency of the Puerto Rican banking sector as it
coalesced into an oligopoly. Notably, contravening institutional precepts, consolidation
activity was sanctioned by a regulator overtly concerned with stemming rapidly
deteriorating macroeconomic conditions. No other research is known to have
investigated the locality’s unique circumstances nor a dramatically contracting
marketplace in the United States. Statutory guidelines designed to preclude excessive
market concentration ensure the sui generis nature of the setting. The main research
questions considered are whether the emergence of an oligopoly affected the system’s
operating performance, were institutions impacted in a similar manner, and was the
regulatory objective of concocting a more resilient banking sector achieved. To address
these inquiries, the dissertation is guided by the conceptual framework advanced by
real resource theory, as manifested by both the intermediation and production
approaches. Performance of the banking system is measured by applying quantitative
methods designed to gauge the individual participants’ ability to convert or transform
inputs into outputs. The non-parametric approach advanced by Data Envelopment
Analysis estimates the operating efficiencies for each commercial bank. The Malmquist
Total Factor Productivity Index then segregates the contributors to performance
between technological innovation and managerial effectiveness. Finally, the parametric
method associated with the Tobit model assesses the relative contribution to
productivity of specific endogenous and exogenous parameters. Congruous with recent
research devoted to oligopolistic market structures, the results reveal an improvement in
systemic performance although with asymmetric reverberations. Consequently, for
policymakers, the study concludes that under certain conditions fomenting a highly
concentrated marketplace is advisable. However, heightened monitoring would be
warranted to prevent abusive anti-competitive practices. For practitioners, the findings
highlight the importance of technology implementation in driving performance and
advocate particular close scrutiny of expenses pertaining to interest cost and premises
on account of their assessed statistically significant contribution to profitability.