The Linkage between Bank Competition and Stability: New International Evidence
It has been known among researchers that the relationship between bank competition and financial system stability is very complex. This paper, therefore, attempts to fill in the literature gap of the competition-stability nexus by using a sample of 81 countries including both developed and developing countries during the year 2000 to 2013. The results from fixed effect panel regression technique reveal that proxies for bank competition, specifically market concentration and market pricing power, have opposite effects on financial system stability. Therefore, in order to enhance the stability of the financial system, the policy makers need to consider the policy that (1) makes the market to be less monopolized by a few key players and (2) ensures that all players have enough margins to withstand economic fluctuation. In addition, these two competition measures together with three bank-specific variables, namely efficiency, revenue diversification and portfolio risk, can well explain the variation of financial system stability in the sampling countries and periods. The results are robust to an array of alternative variable specifications.
Submission of a manuscript to Applied Economics Journal will be taken to imply that the author(s) guarantee that the paper is an original work, has not been published, and is not being considered for publication elsewhere either in printed or electronic form. The author(s) have obtained permission from the copyright holder to reproduce in the article material not owned by them, that author(s) have acknowledged the source, and that this article contains no violation of any existing copyright or other third party right or any material of an obscene, indecent, libelous or otherwise unlawful nature and that the article does not infringe the rights of others. The author(s) will indemnify and keep indemnified the editors and Applied Economics Journal, Center for Applied Economics Research (CAER), Faculty of Economics, Kasetsart University against all claims and expenses. The author(s) agree that the publisher may arrange for the article to be published and sold or distributed on its own, or with other related materials, and could reproduce and/or distribute in printed, electronic or any other medium whether now known or hereafter devised, in all languages, and to authorize third parties to do the same.