Impact of the level of bank liquidity on the relationship between concentration and bank efficiency: the case of the WAEMU

Abstract

In this article, we investigate the impact of bank liquidity level on the relationship between bank concentration and efficiency using a panel dataset of 60 banks across 7 WAEMU countries over the period 2005-2016. Our empirical methodology is based on the 2SLS IV estimator and non-linear analysis. Our results show that the concentration of the banking sector and the bank liquidity are negatively correlated with cost efficiency in the WAEMU. This is consistent with the Quiet Life Hypothesis which established that concentrated market incites suboptimal behaviors damaging to the banking profitability. However, the effects of concentration on cost efficiency are reduced for banks with lower levels of excess liquidity. This result shows that the holding of excess liquidity reinforces the effects of the Quiet Life Hypothesis.