Bank consolidation and financial stability revisited: Evidence from Indonesia

Inka Yusgiantoro, Wahyoe Soedarmono and Amine Tarazi
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Inka Yusgiantoro: Otoritas Jasa Keuangan (Indonesia Financial Services Authority)

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Abstract: This paper extends prior literature on the link between consolidation and stability in banking using a single country setting. From a sample of Indonesian commercial banks over the 2010-2015 time span, we construct the Lerner index as a measure of bank market power due to consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks' market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability. JEL Code: G21, G28

Keywords: Consolidation; ownership type; size; financial stability; Indonesian banking (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban and nep-sea
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Working Paper: Bank consolidation and financial stability revisited: Evidence from Indonesia (2019)
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