What is it about?

The issue of welfare loss from mispricing due to the exercise of market power of banking firms can be minimized. It should, however, take into consideration the advent of cost-efficient banks and efficient knowledge about local market dynamics. In other words, banks with the highest market knowledge and are cost efficient are better placed to protect financial consumers. Further, there is heterogeneity in the impact of cost efficiency on banks’ welfare performance. Specifically, cost efficiency has a significantly larger hedging impact on welfare losses in banks with extreme losses to financial consumers. Therefore, cost efficiency effect on banks’ welfare performance is conditioned on the level of welfare losses in the banking sector. Additionally, if welfare gain is synonymous with cost-efficient banks, then the presence of a quiet life is typical of financial consumer protection.

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Why is it important?

This study examines how cost efficient banks protect financial consumers by hedging the social cost induced by mispricing resulting from the exercise of banks market power. The study is important because it provides that cost efficient banks and welfare gains may not be mutually exclusive and that these two policy variables co-evolve.


The study provides policy makers another mechanism to tame the high social cost of financial intermediation, given that prior financial liberalisation polices have had limited success at dealing with high interest rate in developing countries.

David Adeabah
University of Ghana

Read the Original

This page is a summary of: Cost efficiency and welfare performance of banks: evidence from an emerging economy, International Journal of Managerial Finance, July 2020, Emerald,
DOI: 10.1108/ijmf-06-2019-0212.
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