This thesis is concerned with banking market imperfections, most especially real resources costs and imperfect competition. A special focus is made on the empirical estimation of the importance of such imperfections in the Portuguese market. The thesis is organised in three different essays, being the first focused on real resources costs, the second on market power and price and non-price competition and the third chapter discusses the impact of such imperfections on the measurement of interest rate risk. The first chapter is an empirical study on real resources operating costs in Portuguese banking. The approach followed is the stochastic cost frontier, because this methodology allows the simultaneous estimation of measures of economies of scale and scope as well as production efficiency and input substitutability estimates. The theoretical framework developed differs from existing literature on the explicit inclusion of the balance sheet constraint on the cost minimisation problem, being concluded that deposits should be handled as an output. Results show a clear evidence for the existence of economies of scale for the smaller banks and some costs advantages for the larger ones associated with high productivity of their branching networks. Economies of scope between deposits and loans were found for all but the larger banks. Portuguese banks were found to be particularly cost inefficient. The second chapter studies the evolution of market power on the Portuguese deposits market under the current deregulation process. Using panel data, three equations were estimated representing optimality conditions for deposit rates, advertising expenditures and branches. An important conclusion is that interest rate and entry deregulation were associated with an increase in both price and non-price competition. The small banks were found to have virtually no market power on deposits, being the situation especially unpleasant for the foreign institutions following growth strategies. On the other hand, significant market power was detected for banks with market shares for above 5%. However, above that level, we didn't detect a positive relationship between the two variables. Thus, mergers between large banks will not directly increase market power for the participating firms, although will create a favourable situation for the overall industry, trough the price-concentration relationship. The third chapter analyses the problem of measurement of interest rate risk exposure of a financial intermediary operating under imperfect competition. A solution proposed by Dermine (1985) is criticised since it doesn't take in consideration the optimising behaviour of such an intermediary. It is also shown that unlike in Dermine's article, imperfect competition also affects exposure through durations of assets and liabilities, and not only through goodwill. Another consequence of this modelling approach is that other imperfections like required cash reserves and operating costs (responsible for an operating leverage effect) seem to influence exposure. An important conclusion is that duration gap analysis is biased and inappropriate to measure exposure, being concluded that net worth immunization requires that assets have different duration than liabilities, rather than equal.
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