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Bank stability in the Indian subcontinent region: Evolution and determinants

Rachita Gulati, Nirmal Singh, Sunil Kumar and Geeta Duppati

Pacific-Basin Finance Journal, 2023, vol. 79, issue C

Abstract: This study examines how bank stability has evolved and its determinants in four major countries of the Indian subcontinent - India, Nepal, Bangladesh, and Pakistan – during 2004–2018. Using the stability frameworks of the sampled countries, we build a PCA-weighted composite indicator of bank stability. Econometric estimation is performed using dynamic panel methods to capture the influence of bank-specific, industry-specific characteristics, macroeconomic disparities, and institutional quality on bank stability. Empirical evidence shows that the banking systems in India, Nepal, and Bangladesh experienced a jolt in stability levels in 2013–14, and the recovery to the previous level of stability is not instantaneous. Larger banks, in terms of total assets, appear more stable in India. However, results validate the prevalence of the “too big to fail” hypothesis in Bangladesh and Pakistan. The analysis confirms the “diversification-stability” hypothesis for Nepal. Inflation shows a deleterious influence on bank stability in the region, whereas the quality of institutions has a beneficial effect on the stability of Indian and Nepalese commercial banks. The findings are consistent across alternative panel models and bank stability aspects.

Keywords: Bank stability; Indian subcontinent; Dynamic panel models; Two-step system GMM; Weighted PCA (search for similar items in EconPapers)
JEL-codes: C23 C24 G21 G28 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.pacfin.2023.102023

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