Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis

Abu Hanifa Md Noman, Sok-Gee Chan and Che Ruhana Isa

PLOS ONE, 2017, vol. 12, issue 5, 1-27

Abstract: This study examines the influence of competition on the financial stability of the commercial banks of Association of Southeast Asian Nation (ASEAN) over the 1990 to 2014 period. Panzar-Rosse H-statistic, Lerner index and Herfindahl-Hirschman Index (HHI) are used as measures of competition, while Z-score, non-performing loan (NPL) ratio and equity ratio are used as measures of financial stability. Two-step system Generalized Method of Moments (GMM) estimates demonstrate that competition measured by H-statistic is positively related to Z-score and equity ratio, and negatively related to non-performing loan ratio. Conversely, market power measured by Lerner index is negatively related to Z-score and equity ratio and positively related to NPL ratio. These results strongly support the competition-stability view for ASEAN banks. We also capture the non-linear relationship between competition and financial stability by incorporating a quadratic term of competition in our models. The results show that the coefficient of the quadratic term of H-statistic is negative for the Z-score model given a positive coefficient of the linear term in the same model. These results support the non-linear relationship between competition and financial stability of the banking sector. The study contains significant policy implications for improving the financial stability of the commercial banks.

Date: 2017
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0176546

DOI: 10.1371/journal.pone.0176546

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