How do banks price loans in the context of market concentration? Empirical evidence from Vietnam

Abstract

This paper investigates how market concentration influences banks' loan pricing in Vietnam, using an unbalanced panel dataset of 28 commercial banks from 2007 to 2023. The findings reveal that higher market concentration leads to increased loan costs, supporting the market power hypothesis. Banks in more concentrated markets exhibit stronger pricing power, allowing them to maintain higher interest rate spreads due to reduced competition. Moreover, larger banks with diversified income sources and higher current account savings account (CASA) ratios tend to offer lower loan prices. The quantile regression analysis shows that the effect of market concentration on loan pricing becomes more pronounced at higher loan price quantiles, indicating that banks with higher lending costs are more affected. Robustness tests using alternative proxies for market concentration, total deposits and total assets reinforce the consistency of the results. The study controls for various bank-specific characteristics and applies several econometric techniques, including GMM, Prais-Winsten, and Newey-West standard errors, to address concerns of endogeneity, autocorrelation, and heteroscedasticity. This research highlights the potential adverse effects of banking market concentration, such as reduced financial accessibility and inefficiencies in credit allocation, and emphasizes the need for regulatory measures to promote competition and financial inclusion.