Market structure, profits, and spreads in the Mexican banking industry

In this paper we consider two market power theories (the Structure-Conduct-Performance, or SCP, and Relative Market Power, RMP) and the Efficient Structure (ES) hypothesis to characterize empirically the Mexican banking industry over 1996-2003 and then use a similar framework to investigate the determinants of interest rate spreads. To our knowledge, this is the first study to carry out such an analysis of net interest rate margins for the Mexican banking sector. Our results seem to give only weak support to the traditional SCP paradigm in Mexican banking but also uncover evidence of strong relationships between profitability and the banks' capital ratios. Furthermore, we do not find evidence that concentration and market share are associated with high interest rate spreads, while our chosen proxy for inefficiency is found negatively and significantly related with both profits and spreads thereby giving support to the ES hypothesis. Overall, our findings suggest that alternative models that include efficiency be pursued in future research on profits and spreads in Mexican banking.