Impact of regulation on the structure and performance of financial markets : the case of Honduras

The main tool of analysis is the estimation of a bank profit function, in order to derive conclusions about market efficiency. The Honduran authorities have argued that the small size of the market and the high concentration of the funds mobilized in a few large banks have resulted in the poor performance of the banking system. Politicians cite as evidence of these deficiencies the concentration of banking operations in the urban areas, the high transaction costs incurred in the provision of financial services, and the substantial profits of the financial industry. In response to these actual or presumed shortcomings, the Honduran authorities have actively intervened in financial markets. Rather than improving market performance, however, regulation has introduced allocative distortions and has created opportunities for rent-seeking by powerful interest groups. This paper examines the behavior of Honduran banks and the structure of this country"s financial markets in order to explore the validity of the assumptions behind the ostensible objectives of the Honduran regulators. (Author abstract)