How do bank competition, regulation, and institutions shape the real effect of banking crises? International evidence (original) (raw)

Linking Bank Competition, Financial Stability, and Economic Growth

Journal of Business Economics and Management

This paper investigates the effect of bank competition and financial stability on economic growth by examining panel-data from 38 European countries over 2001 to 2017. Bank competition is measured with the Boone indicator, and bank stability with Z-scores and non-performing loan ratios, all at the country level. This study employs a fixed-effect estimator, as well as a system generalized method of moment (GMM) estimator to control unobserved heterogeneity, endogeneity, the dynamic effect of economic growth, and reverse causality in its estimation. Results show that bank stability significantly contributes to economic growth in Europe. Economic growth falls during crisis periods (both the global financial crisis and the local banking crisis), highlighting the importance of a resilient banking system during crisis periods. Moreover, empirical outcomes show that lower banking competition supports economic growth and increases financial stability. This study provides a framework for ban...

How Does Bank Competition Affect Systemic Banking Crises?

Colombo Business Journal

Literature present conflicting views on the effect of bank competition on financial stability. Some argue that competition increases adverse shocks in the financial system while others argue that it reduces the likelihood of such events. The purpose of this study is to further examine this relationship using a more recent systemic banking crises database of Laeven and Valencia (2018). There are 61 countries which had experienced systemic crises during 1996-2017. This study used Lerner index and Boone indicator as proxy measures of competition and three estimation techniques to estimate the relationship. The results indicate that the effect of competition on financial stability varies with estimation techniques and proxy measures of competition and stability. Lerner index indicates that competition increases financial instability while Boone indicator shows the opposite. Thus, this study concludes with mixed evidence on the relationship between bank competition and financial stability.

Bank Competition and Financial Stability

Journal of Financial Services Research, 2008

Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. Even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. We test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. Our results suggest that-consistent with the traditional "competition-fragility" view-banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the "competitionstability" view-that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.

The Impact of Banking Competition on Economic Growth and Financial Stability: An Empirical Investigation

European Journal of Sustainable Development

The paper examines the level of competition in banking market using different econometric models and analyzes the impact of efficiency of the banking system on the economic growth of the country. The research discusses to ensure banking competition as a function of the Central Bank. Also, the paper includes some recommendations developed to improve banking competition. Our hypothesis is that the existence of high levels of banking competition and low concentration in the banking market balances the speed of money supply in the economic sector. As a result, the Central Bank's monetary policy will be more effective in achieving its core objectives. Therefore, banking competition contributes to the economic growth of the country. In addition, the monetary policy of the Central Bank concentrates on financial stability, which is one of the fundamental factors in the economic development of a country.

Does bank competition affect bank stability after the global financial crisis

2016

This paper addresses the dynamic relationship between competition and bank stability in Albanian banking system during the period 2008 - 2015. To this purpose, we construct a proxy for bank competition as referred to the Boone indicator. We also calculated the Lerner index and the efficient adjusted Lerner index, as well as the profit elasticity index and the Herfindahl–Hirschman Index. The main results provide support for the “competition – stability” view – that lower degree of market power sets banks to less overall risk exposure. The results further show that increasing concentration will have a larger impact on bank’s fragility. Similar, bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. We also used a quadratic term of the competition measures to capture a possible non-linear relationship between competition and stability, but find no supportive evidence.

Bank Competition, Crisis and Risk-Taking: Evidence from Emerging Markets in Asia

Journal of International Financial Markets, Institutions and Money, 2013

This paper investigates the impact on financial stability of bank competition in emerging markets by taking into account crisis periods. Based on a broad set of commercial banks in Asia over the 1994–2009 period, the empirical results indicate that a higher degree of market power in the banking market is associated with higher capital ratios, higher income volatility and higher insolvency risk of banks. In general, although banks in less competitive markets hold more capital, the levels of capitalization are not high enough to offset the impact on default risk of higher risk taking. Nevertheless, during crisis periods, specifically the 1997 Asian crisis that has directly affected Asian banks, market power in banking has a stabilizing impact. A closer investigation however shows that such findings only hold for countries with a smaller size of the largest banks, suggesting that the impact of bank competition is conditional on the extent to which the banking industry may benefit from too-big-to-fail subsidies. Overall, this paper has policy implications for bank consolidation policies and the role of the lender of last resort.

Bank market power, economic growth and financial stability: Evidence from Asian banks

Journal of Asian Economics, 2011

This paper examines whether Asian banks are still prone to moral hazard in the aftermath of the 1997 Asian crisis. Using a sample of commercial banks from 12 Asian countries during the 2001-2007 period, our empirical findings highlight that higher market power in the banking market results in higher instability. Although banks are better capitalized in less competitive markets their default risk remains higher. A deeper investigation however shows that such a behaviour is dependent on the economic environment. Higher economic growth contributes to neutralize higher risk taking and higher instability in less competitive markets.

Does Bank Competition affeCt staBility in the Banking seCtor after the gloBal finanCial Crisis?

2017

This paper analyses the inter-temporal competition – stability nexus after the global financial crises based on a Generalised Method of Moments with quarterly data for the period 2008 – 2015. Empirical results strongly support the “competition – stability” view after the global financial crises that higher degree of competition boosts further bank stability conditions. Results further indicate that greater concentration has also a negative impact on bank stability. Finally, we do not find a non-linear relationship between competition and stability. JEL Codes: C26, E32, E43, G21, H63.

Bank concentration, competition, and crises: First results

Journal of Banking & Finance, 2006

GDP per capita is in constant dollars, averaged over the entire sample period. Crisis period denotes the years in which each country experienced a systemic banking crisis and the duration of said crisis. Concentration is calculated as the fraction of assets held by the three largest banks in each country, averaged over the sample period. Crisis Definition is coded 1 for crises wherein non-performing loans exceeded 10%, 2 for cost of crisis greater than 2% of GDP, 3 for crises where the majority of the banks were insolvent and emergency measures were taken and 4 for crises where large-scale nationalization took place. Detailed variable definitions and sources are given in the data appendix.

Does banking market power matter on financial stability?

Management Science Letters, 2020

This study investigates the impact of market power on bank financial stability using bank-level data from 24 banks in Vietnam over the 2008-2017 period. In order to measure the degree of market power in the Vietnam banking sector, we compute the separated Lerner index by fixed effect model, random effect model, and Zscore as a measure of financial stability. We use the static and dynamic panel data regression methods to estimate the relationship between market power and financial stability. Our results support the "competitionstability" view and show that Vietnamese commercial banks facing little competition tended to be less stable. We also find that size had a positive effect on stability while loan growth rate had a negative effect on financial stability. The study suggests some important policy implications for improving bank stability in Vietnam.