Bank Competition + Market Concentration = Financial Stability?

Jovi Clemente Dacanay (), Ella Mae Odtuhan Leonida () and Michaela Nicole E. Meriño ()
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Jovi Clemente Dacanay: University of Asia and the Pacific
Ella Mae Odtuhan Leonida: RingCentral
Michaela Nicole E. Meriño: University of Asia and the Pacific

Chapter Chapter 3 in Bank Competition and the Effects on Financial Stability, 2024, pp 49-166 from Palgrave Macmillan

Abstract: Abstract The current debate in banking literature revolves around the effect of competition on the financial stability of banks (Berger et al. 2008). Given the current environment, does bank competition and concentration lead to financial stability (Dacanay 2017)? Using the techniques of traditional and the new empirical industrial organization literature, the study verified the occurrence of competition-fragility and competition-stability in an imperfectly competitive and loans market-concentrated UKB industry bound by regulatory bank capitalization (Amidu et al. 2013). In a banking industry with dominant and fringe banks, the Top 20 banks of the Philippines are expected to exercise their market power by charging higher loan rates with sights set on improving their profit margins and monitoring technology. According to Schliephake (2016), this is how banks bring in sufficient capital buffer. To test the competition-fragility and competition-stability views, this study used the following dependent variables to test the competition-fragility and competition-stability views: the Z-index NPL to total loans ratio (indicator for portfolio risk); and the equity to total assets ratio (indicator for bank capitalization). Said dependent variables were regressed using GMM with measures of market power—the adjusted Lerner Index, HHI for deposits and loans, and other bank-specific control variables, following the methodology of Berger et al. (2009). The empirical results verified that the profit-margin and risk-shifting effects among the Top 10 banks outweighed the buffer effect. By contrast, the Next 10 banks achieved higher profit margins that they channeled to greater capitalization ratios. With sustained market concentration, dominant banks are expected to promote an environment of stability by pursuing higher capital ratios.

Keywords: Imperfect competition; Market concentration; Financial stability; Financial fragility; Capitalization (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:pal:pmschp:978-3-031-59599-8_3

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DOI: 10.1007/978-3-031-59599-8_3

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