Competiton and bank stability in asean countries an empirical analysis

Problemstatement

Theimpactofcompetitiononbankstabilityhasbeenanissueofactivedisputationi n b o t h academicandpolicycirclesforoverthreedecadesandespeciallysince1997-1998Asian andthe2007-2008globalfinancialcrises.

The debate surrounding banking deregulation in the United States during the late 1970s and early 1980s intensified the international trend of banking liberalization in both developed and emerging economies This shift increased competition within the banking sector, allowing large banks from advanced countries to enter developing markets with higher profit margins, despite operating at lower profit margins themselves Economists have noted that this deregulation positively affects financial depth, growth, income distribution, and efficiency, leading to the belief that fierce competition among banks fosters a more efficient banking system Consequently, competition is viewed as a prerequisite for an efficient, innovative, and developed financial system.

Kunt& Peria,2 0 1 0 ; W e i l l , 2 0 1 3 ; Apergis,Fafaliou,&Polemis,2016).

Unfortunately,thereisafactthat,coupledwithmorecompetitionthroughfinancialliber alizationistheemergenceofsystemicbankingcrisesinthelasttwodecadesofthe2 0 t h c e n t u r y andl e a d i n g r e g u l a t o r y failurest o bringt h e b a n k i n g s y s t e m i n d i s c i p l i n e haveraisedconcernsamongpolicymakersandacademicsregardingthesubsequenteffecto f competitiononbankstabilityinthebankingsystem.Consequently,theconcernaboutt h e e xtenttowhichcompetitionisresponsibleforthesecrisesisstillnoconsensusastowhetherhi ghor lowcompetitionleadstobankstabilityin thebankingsystem.

Intermsofbankingsectorinemergingcountries,competitionhasbeenincreasingd u e t o t h e trendo f penetrationi n t o t h e bankingmarketo f largeforeignbanksfromadvanc edcountries.This prompteddomestic bankstoacceleratetheconsolidationprocesstoprotect theirmarketpower,leadingtotheappearanceof"toobigtofail"banksandt h e moralhazardinc entivesa r e m o r e l i k e l y t o e x p l o i t governmentaid(Berger& Mester,2003).

Furthermore,businessesdependsignificantlyonbanksforexternalfundingtosecuret h e i r operations(Adam,2008).Asa consequence,bankstabilityi s a m a j o r concernforpolicymarkerintheformulationofimportantpolicies.Inrecentdecade stherelationshipbetweencompetitionandbankstabilityhasbeenresearchedempiricallyfocusi ngon both developedanddevelopingnations.

Nevertheless,thefindingsof thosestudiesendedupwith conflictingexperimentalres ultskeepingthis linkstilla puzzle Inaddition, i n ordertoresolvetheconsolidationlogic ally,regulatorsneedtoconsiderhowitcouldaffecttheiroverallgoalofthefinancialsystem,whichi s to maximizesocialwelfare.

Scopeof thestudy

Understandh o w c o m p e t i t i o n canformt h e incentiveso f t h e crediti n s t i t u t i o n s f o r risktakingisessentialforastable andefficientbankingsystemthatcanfinancetimelyprofit ableinvestmentopportunitiesandr e m a i n sustainableeconomicgrowth.Byt h e aboveimpo rtanceroles,fewresearcheshavefocusedontheimpactofcompetitiononthes t a b i l i t y ofb ankingsystemin theASEANcontext.Thisstudyalsocontributestothefull implementationofthisgapbyusingsamplesof226commercialbanksfrom7countrieso f AS

EAN 1area ThesecountriesincludeCambodia,Indonesia,LaoPDR,Malaysia,ThePhilippines,

Intermsofthisstudy‘sterritorialscope,theASEANregionhasseenanattractivesamp leprovidinga f e r t i l e l a b o r a t o r y t o analyzet h i s r e l a t i o n s h i p , b e c a u s e i t s b a n k i n g i n d u s t r y hasbeenexperiencedliberalizationviaforeignbankpenetrationinearly 1990s,followedbyderegulation,regionaleconomicintegration,andtremendousconsolidation inl a t e 1 9 9 0 s asp o r t 1 9 9 7 -

9 8 Asianfinancialc r i s i s strategies.Specifically,t h e b a n k i n g sectorinthisareahasbeens equentiallyandsignificantlyaffectedfromtheAsiancrisisin

AssociationofSoutheastAsianNations(ASEAN)isaregionalorganizationcomprisingtenSoutheastAsiannatio nsthatpromotesintergovernmentalcooperationand facilitateseconomicintegrationamongstitsmembers.SinceitsformationonAugust8,1967byIndonesia,Malaysi a,thePhilippines,Singapore,andThailand,membershiph a s e x p a n d e d t o includeBruneiDarussalam,Cambodi a,LaoP D R , Myanmar,andVietnam.

1997,severert h a n anyo t h e r emergingareas.Indonesia,Thailandhasbeencountriesbeingaff ectedthemost(1998-1999,NPLsratiofrom33%tonearly50%

(WorldBank)).Malaysia,Laosandt h e P h i l i p p i n e s haveexperienceda suddenpricecoll apse,w h i l e Singapore andVietnamarealmostunaffected.

The Southeast Asian region was significantly impacted by the global financial crisis due to its export-oriented economy, which heavily relies on international trade and foreign investment The level of vulnerability in this region is closely linked to its openness to international capital flows, the banking business model, and access to the real estate sector In the short term, sectors such as exports, the stock market, and banking and financial services experienced strong adverse effects from the crisis The freezing of financial systems in developed countries led to a reduction in various activities, including manufacturing, business operations, and personal consumption, contributing to a decline in public confidence.

In the process of deregulation, many policymakers are imposing market entry restrictions and regulations on bank supervision Consequently, the banking sector faces strong barriers to entry and limited import allowances In certain countries, such as Vietnam, the banking industry is dominated by state intermediaries that require assistance during times of distress Since the government halted the licensing of new banks on September 8, 2008, barriers to the emergence of new banks have increased significantly Additionally, new banks must adhere to specific charter capital provisions and demonstrate profitability over a required number of years while being closely monitored by the State Bank.

Inaddition,t h e barrierst o e n t r y ba nk in g s e c t o r s arealsoreflectedt h r o u g h markets egment,t h e targetmarkett h a t b a n k s a r e targeting,b r a n d v a l u e andc u s t o m e r b ase,customerl o y a l t y t h a t b a n k customershaveb u i l t f o r s u c h barriers,t h e b a n k mar keti s m a i n l y national.However,forthecountriessignedanumberofinternationaltradeagr eementss u c h asWTOandt h e A S E A N EconomicC o m m u n i t y ( A E C ) havep o s e d enormouschallengesf o r t h e bankingsectori n t h e adjustmentprocessandreformst o m o v e towardsabankingsystemofsustainabledevelopment andstability.

Inbrief,A S E A N b a n k i n g marketi s d i s t i n c t i v e byt h e f o l l o w i n g r e a s o n s Firstly,ASEAN‘scentralbankspushedcommercialb a n k s towardsconsolidationi n ordert o attainbankstability.Secondly,t h e governorso f A S E A N centralbanksendorsedt h e A S E

By 2020, countries including Indonesia, Malaysia, the Philippines, Singapore, and Thailand are expected to see increased competition in their banking markets, potentially enhancing efficiency and achieving economies of scale (Yamanaka, 2014) However, this heightened competition may drive smaller banks towards consolidation to strengthen their domestic presence and compete more effectively with regional banks (Asia Development Bank, 2013) Such consolidation could lead to a high concentration of regional banks, raising concerns for policymakers and regulators due to the resulting monopolistic power, which can increase loan interest rates and hinder access to credit and financial inclusion This situation also poses risks to the stability of the regional banking system, particularly given the limited research on the relationship between competition and bank stability in emerging Asia.

Thecriseshave promptedabroad d e b a t e t o find o u t thestructuralandregulato rypoliciesthatcanimprovetheresilienceofthebankingmarket,bothinmaturedeconomiesande mergingcountries.Infact,thebankingsectoroftheASEAN countrieshasundergoneadra matictransformationinthethreedecadesfromderegulationtore- regulationbasedontheexperienceoftheAsianfinancialcrisis.Inthese debates,therearet w o typicalargumentsaswellasitssolution,"competition- fragility‖and―competition - stability‖.What of marketpowerormarketcompetitionw il l helpstabilizethefinancialandban kingsystemrunbetter?

Thus,thestructureofthebankingmarketandthelevelofcompetitionamongfinancialintermedi ariesi s animportantaspectf o r e s t a b l i s h i n g policiesandregulations,fromgovernment,cent ralbanks to supervisoryauthorities.

Thispaperu s e s a s a m p l e o f 2 2 6 commercialb a n k s i n A S E A N countriesd u r i n g 1995-2015whichcaptures1997-98Asianfinancialand2007-

08globalfinancialcrisest o investigatet h e relationshipbetweencompetitionandbanks t a b i l i t y thougha p p l y i n g variousriskmeasures.Indeed,thisstudyalsoextendtoexaminew hetherfinancialcrisesandtoo-big-to- fails u b s i d i e s influence,o r s o m e r e g u l a t o r y frameworksuchasdepositinsurance,activityrestrictionsinfluencethis nexusin ASEANcountries.

Researchobjectivesandresearchquestions

A S E A N countriesconsisto f Cambodia,Indonesia,LaoPHD,M a l a y s i a , Myanmar,Thail andandVietnaminthecontextthatbankconsolidationraisedmassivelytofacetheconsequence sof the1997 Asiacrisisand 2008 crisis.Inparticular,

- Doesthe1997Asiancrisisand2008globalfinancialcrisesimpactonrecentcriseso n t h e relationshipof competition andstability?

Researchmethodology

Thiss t u d y employstheTwo-StageLeastSquares(2SLS)w i t h fixed- effectregressionestimatorinstaticIVmodel.Competitionmeasuresincludethenon- structuralapproaches(H- statistic,Lerneri n d e x ) andt r a d i t i o n a l approachp r o x i e s f o r bankconcentration( H

H I i n d e x andC R 3 ( c o n c e n t r a t i o n ratioo f larget h r e e banksi n l o a n market).F orproxy ofba nk stability,the Z-scoreisused asthemain measure.Besides,Non- performingl o a n s andCapitalizationratioareappliedalsoast w o alternativemeasuresoffinanci aldistress/stabilityandrisk-takingmeasurement(Fuetal,2014;Berger,2009).

Contributionsandimplications

Thebankingsystemisincreasinglycontributingsignificantlytotheeconomicdevelo pmento f a region,asenterprisesn o w v i e w t h e bankast h e i r externalsourceo f f u n d s tosu staintheiroperations.Theinternationalprocessofbankingliberalizationalsoentailedt h e ar rivaloflargeforeignb a n k s i n t o t h e emergingmarkets,whichaffecteds t a b i l i t y andi ncreasedc o m p e t i t i o n i n t h e bankingsector Inaddition,accordingt o fact observation,thisinternationalizationtrendhasalsogonehandinhandwiththeincreasedemerge ncesofsystemicbankingcrisesin thelasttwodecadesof the20 thcentury

Thus, in anattemptto saythis studycontributestoliteraturein severalways.Firstly,i t contributestothe debateon t h e competition/ s t a b i l i t y relationsh ipbyprovidingnewevidencefrome m e r g i n g A S E AN c ou nt ri es S e c o n d l y , t h e stud yusesa lo ng panel datacovering21yearsfrom1995to2015,whichcapturesthe1997-

08globalfinancialcrises.Thisallowsthedevelopmentofanexpandeddatabasetoexaminet h e connectionbetweencompetition,crisisandbankstability.Tothebestofmyknowledge,allrel evantdocumentsthatexaminetherelationshipbetweencompetition andbankstability thatprovide furtheranalysis oftheeffectsoffinancialcrisesor based onpre-globalfinancialcrisis,exceptionsofFuetal.

Thirdly,t h e s t u d y examinest h e impacto f recentb a n k i n g criseso n c o m p e t i t i o n - s t a b i l i t y nexust o significantp o l i c y implicationsregardingconsolidation,capitalization ,andactivityrestrictions.

Fourthly,t h e researcha d d s t h e regulatoryv a r i a b l e s s u c h asa c t i v i t y r e s t r i c t i o n s , e n t r y i n t o banking,capitalrequirements,anddepositi n s u r a n c e i n t h e e c o n o m i c specificationsincetheycansignificantlyaffectthelinkbetweencompetitionandstabilit y(Agoraki,Delis& Pasiouras,2011).Finally,t h i s researchc o n t r o l s endogenousa b i l i t y betweencompetitionandbanks t a b i l i t y byu s i n g 2SLSestimatorst h a t introduces t o c k m arketcapitalization,financialfreedomandp r o p e r t y rightasadditionalinstrumentalvariables.

Limitationsandstructureof thethesis

This studyalsocould notavoidcertainrestrictions, typicallydatabase,measures andmethodology.T h e s a m p l e o n l y capturest h e commercialbanks,i g n o r i n g o t h e r b a n k i n g activitiessuchascooperativebanks,realestateandmortgagebanks.Investmentbanksaree x c l u d e d intheanalysissample,toensuresomehomogeneityinthetypeofandtoallowf o r datacomparability.Besides,someregulatoryvariablecannotbecollectedadequatelyd u e t o lacko f reportingbycountrieswhicht h e n causest o errormeasurementi n t h e calculatio no f t h e v a r i a b l e Limitingm e a s u r e ofbankconcentration:HHIdeposits( A country- levelindicatorofbankconcentration,representedbytheHerfindahl–

Hirschmandepositsi n d e x , w i t h highervaluesdemonstratingh i g h e r marketconcentration( Berger,2009).Otherlimitationsofthiswritingthatitdoesnotanalyzeinfluenceofforeignbanks att h e h o s t countries.Itn o t , t h a t m a y providea wedgebetweent h e measuremento f mar ketpowerfordomesticversusforeignbanks.

This study is organized into five sections Section 1 offers a brief introduction to the topic Section 2 provides a comprehensive review of relevant literature concerning the relationship between competition and bank stability or fragility Section 3 explores various approaches to measuring competition and bank stability, including the models used to investigate this relationship and specific data sources Section 4 presents the research findings and their explanations Finally, Section 5 includes conclusions, policy recommendations, limitations, and suggestions for further research.

Thissectioncontributest o t h e relatedtheoriesanddebatest o t h e competition- s t a b i l i t y nexusbyprovidingempiricalevidencewhichsupportmanyconflictingviews aswellasintroducingvariousapproachmethod toinvestigatethis relationship.

Theoreticalliterature

Mainargumentsaboutrelationshipbetweencompetitionandbankstability

Then e x u s betweenc o m p e t i t i o n andbanks t a b i l i t y is n o t cleari n b o t h theoretical andempiricalliterature.Keeleyrepresentsthetraditionalcompetition- fragilityviewthatexcessivecompetitioninthebankingmarketreducesthemarketpowerandpr ofitmargino f banksandputsthemathighriskofbankfailureandfragilityinthebankingmarket. Incontrast,B oy andNicolo (2005)representsthemoderncompetition- stability showsthatexcessivecompetitioni n t h e b a n k i n g s e c t o r causesbankst o reduc el o a n interestr a t e s whichwillreducemoralhazardandtheadverseselectionproblemofba nks,lowertheirdefaultrisk,andstrengthenbankstability.Besides,theneutralormutualvie wofMartinez-

MieraandR e p u l l o (2010)arguest h a t b o t h viewsabovecanc o e x i s t , andt h e n e x u s bet weencompetitionandbankstabilityissupposedasnon-linearorU- shapedlink.Insum,thereisnoacademicconsensusonwhetherbankcompetitionleadsmore orlesss t a b i l i t y in thebankingsystem.

Thisv i e w i s groundedbyMarcus(1984)andK e e l e y ( 1 9 9 0 ) , alsok n o w n ast h e ch artervalueh y p o t h e s i s , suggestst h a t m o r e c o m p e t i t i o n amongb a n k s leadst o m o r e fragility.Thishypothesisexplainsthatthehighcompetitioninfinancialmarketweake ns

14 marketp o w e r , r e d u c e s t h e profitmarginandcapitalbuffer,andr e d u c e s t h e franchisev aluethatencouragesbanks toadoptrisk takingstrategiestoraisereturns.

Proponents of the view that larger banks benefit more from economies of scale and diversification argue that in less competitive markets, they can outperform smaller banks (Diamond & Dybvig, 1983) Specifically, increased competition in the deposits market compels banks to engage in riskier practices due to a decline in their franchise value The "charter value" hypothesis suggests that heightened competition can lead to lower lending rates and higher deposit rates, ultimately reducing profit margins This decline in franchise value may incentivize banks to undertake more risk, which can negatively impact the stability of both individual institutions and the financial system as a whole.

(2000)suggestthattheremovalofinterestceilingsondepositsreducest h e franchisev a l u e and motivatesmoralhazardbehaviorsbyb a n k s (e.g.s h i f t r i s k s todepositors).Broecker(1990 )supportedthishypothesisbypointingoutanegativecorrelationbetweentheaveragecreditqualit yandthenumberofbanksin thesystem.

Inaddition,manyarguethatasmallamountoflargebanksisalsoeasytomonitorandsup ervisorinalesscompetitivemarket.AllenandGale(2001)continuetoarguethatbanksearnl e s s i n f o r m a t i o n rentfromt h e r e l a t i o n s h i p w i t h borrowersincompetitivemarkets, whichdiscouragest o m o n i t o r t h e m b e i n g c a u t i o u s andmayl e a d t o increasemoralh azard andadverse selectionproblem.

According to Besanko and Thakor (1993), heightened competition in the banking sector leads to reduced information rents from relationship lending, which in turn increases banks' risk-taking behavior This intensified competition diminishes market power, lowers profit margins, and erodes franchise values Consequently, with profit pressures mounting, banks are incentivized to engage in excessive risk-taking to boost returns, thereby heightening the fragility of the banking industry (Boot & Thakor, 1993; Allen & Gale, 2004).

Otherideasthatthecontagionimpactismoreprominentthancompetitivemarketsa sallbanksa r e p r i c e t a k e r s andb a n k s mayn o t b e encouragedt o providel i q u i d i t y t o tro ubledbanks(Sáez&Shi,2004).Inaddition,too-big-to- failandsafetynetsubsidiesarealsoconsideredf o r t h e bankingmarket.Itm e a n s t h a t e x i s t s t h e largeb a n k s w i t h highconcentration/

15 markets h a r e andcontributesi n e x p l a i n a negativer e l a t i o n s h i p betweenbankcompetiti onandstability.Anumberofrecentempiricalresearchesconsistentwith

15 thisv i e w f i n d t h a t m o r e competition(measuredbyt h e Lerneri n d e x ) i s l i n k e d w i t h a higherriskloanportfolio(measuredbynonperformingloans)inSpain(e.g.Jimenezetal.,2007).

The modern "competition-stability" view posits that increased competition leads to greater stability within financial institutions This perspective suggests that banks with higher market power experience reduced competition in the loan market, prompting them to impose elevated interest rates on borrowers Consequently, this behavior heightens the risk exposure and solvency risks for borrowers, ultimately fostering a tendency towards risk-taking Boyd and Nicolo (2005) provide evidence that banks face challenges related to moral hazard and adverse selection, which can jeopardize their solvency as the risk is transferred from borrowers to banks, indicating a strong correlation between bank risk and borrower risk.

However,iftheopposite inference,t h e banking marketwith anincreaseincompetiti on,byl o w e r i n g t h e interestrateschargedbanks,o r m e n t i o n i n g bettercreditconditionsf orborrowers.Thiswouldmakethemeasiertorepaybankloan,sobanksfacelowercreditriskfort heirloanportfolioandimprovethe stabilityofindividualinstitutions(Boydetal.,2006).

Inaddition,Acharya,GrombandYorulmazer(2012)demonstratethatlargebanksi n c oncentratedmarketsreceivesubsidiesfrompolicymakersthrough"toobigtofail"or"tooimpo rtanttofail"programs.Itmeanschangetheirrisktakingmotivation,encouraget o morerisk,th erebymorevulnerable.Therecentcreditcrunchisempiricalevidencethatlargebanksaredifficult tomonitorbecausetheircomplexityandhighpoliticalaffiliation( J o h n s o n &Kwak,20 11).Moreover,largebanksinafocusedmarketaffectothersthroughthecontagionimpact.Henc e,thefailureoflargebanksinaconcentratedmarkett o t h e wholesystemshould befragile.

However,someauthorsarguethatcompetition-stabilityislinkedinanon-linearorU- shapedmanner byallowingimperfect correlationinloan defaults(Martinez-

Miera &Repullo,2010;Hakenes&Schnabel,2011).Theystatethatthisnon-linearandU- shapedl i n k isashighmarketpowerinlesscompetitiveloanmarkets,whichmakesbanksto sethighinterestratesf o r b o r r o w e r s Inresult,i t r a i s e s t h e i n s o l v e n c y r i s k d u e t o t h e r i s k shiftingeffect;ontheotherhand,italsoenhancesthebank‘sprofitabilityduetomargineffect.

A r i s s (2009)alsoclaimt h a t c o m p e t i t i o n andconcentrationcanc o e x i s t andcanc o n c u r r e n t l y i n d u c e s t a b i l i t y o r fragility.Hence,t h e impactofincreasedcompetitioncould goeitherways,dependingonotherfactorsandthee x i s t i n g levelo f c o m p e t i t i o n Ins u m , competitive– f r a g i l i t y v i e w andcompetition– s t a b i l i t y v i e w a r e s u p p o s e d t h a t b o t h a r e n o t o p p o s i t e perditions,andr a t h e r b o t h cana p p l y simultaneouslyif therisk-takingcanbehedgedbyahighcapitalbuffer.

Nevertheless,therearealsosomestudiesfindthatactuallynospecificrelationship b etweenbankingmarketconcentrationandbankrisk(Yeyati&Micco,2007).

Onaverage,transnationalstudiesprovidemixedresultsrelatedt o t h e s t a b i l i t y o f comp etition.Nevertheless,thereis evidencethat marketconcentrationandmarketcompetitioncanco-existandthisaffectsbankstabilitythroughseveral variouschannels.

Empiricalliterature

Theree x i s t a largen u m b e r o f empiricall i t e r a t u r e s investigatingt h e correlat ionamongb a n k i n g competition, bankstability,b a n k marketp o w e r o r concentrationacro ssm u l t i p l e economiesbyapplyingvariousmeasuresandtechniques.Forexample,Schaeck,

C i h a k andWolfe(2009)samplingof31countriesinthefinancialcrisisduring 1980- 2005s h o w s t h a t t h e o p p o r t u n i t i e s andt i m e t o crisisaredeclinedu n d e r c o m p e t i t i o n afterdirectingforbankingconcentrationwhichdemonstratesapositivelinkwith bankstability.Anothercrossc o u n t r y analysisbyYeyatiandMicco(2007)whicht a k e s a sam pleo f commercialbanksfrom8 LatinAmericanc o u n t r i e s d u r i n g 1993-

2002andf i n d s thatcompetition( pr ox ie d bythePanzarandRosse 1 98 7, H- statistic) ispositive ly relatedtobankrisk(representedbytheZ- score)butnorelationshipbetweenbankingmarketconcentrationandbankrisks,hencefavortoco mpetition-fragilityhypothesis.

2005andstatethatbankswithgreatermarketpowerhavel e s s overallrisk.Thisresearchappl iestheLernerandHHIindexasameasureofmarketpowerandbankmarketconcentrationandZ- scoreasaproxyo f overallbankrisk.Althoughtheirfindingssupport tothecompetition- fragilityparadigm,theyalsosuggestt h a t banksw i t h marketpowerresultsi n r i s k i e r l o a n portfolios(asc a p t u r e d bynon-performingloanratios).

(2014)usesLernerindexandcontingentclaimpricingmodelofMerton(1974)toinvestigateth erelationshipbetweenbankingmarketcompetitionandb a n k s‘i n s o l v e n c y r i s k Theirstu dyt a k e s a sampleo f 1850banksfrom63countriesaroundtheworld.Theresultssuggestbankin gcompetitiont o bepositivelyrelatedtobankstability(thefindingsremainunchangedwhen stillusingmarketconcentrationasarepresentativeformarketcompetition).

(2012)studiesthesimilarconnectionsforbanksoperatingin4SouthEastAsiancountries(Indo nesia, Malaysia,ThePhilippinesandVietnam)inperiod of1998-

2008.Theiranalysisa p p l i e s a v a r i e t y ofbanklevelr i s k indicatorss u c h asl o a n l o s s provisions,l o a n l o s s reserves,v o l a t i l i t y o f e a r n i n g s , andnaturall o g o f Z - i n d e x andPangar-

RossH i n d e x asa competitionproxy.T h e findingss h o w evidencet h a t competitiondoesn ot leadto financialfragility.B e s i d e s , the concentrationis negativelyconnectedwith bank risk, whileregulatoryrestrictions positivelyimpactbankfragility.

(2014)findtheconnectionbetweenbankcompetition(measuredbyLernera n d HHI)andban ks t a b i l i t y (measuredcontingentclaimpricingm o d e l o f Merton(1974)).T h i s analysisi s b a s e d o n bank-specificdatafrom1 4 A s i a Pacificcountriesintheperiodof2003-

2010andusesbothaccountingbasedandmarketbasedmeasuresofbankstability.Theirstudyc laimsthatLernerindexisinverselyassociatedt o banksr i s k s w h i l e e x i s t s a p o s i t i v e l i n k betweenconcentrationandbankfragility.

MieraandRepullo(2010)hasexploredthepossibilityofsomenonlinearrelationship.Freixasand Ma(2014)havebeeninvestigatedontheeffectofcompetitiononvariousaspectsofbankstabili ty.Boydetal.(2006)andD e Nicoloa n d Loukoianova(2 00 6) bo th e x p l o r e t h a t theZ- scorei nd ex , aninversemeasureo f b a n k r i s k , lowerwithbankingmarketconcentration(m easuredbyH H I i n d e x ) , suggestingt h a t t h e r i s k o f b a n k i n s o l v e n c y increasei n m o r e concentratedmarkets.

Moreover,businesscyclet h e o r y assumesthatduringbanksapplyconservativeapproa chesincreditmanagement,shrinklowextension, andfocusonbuildingacapitalbuffer(Jo

18 kipii &Milne, 2008).Suchactivi ty canhelpbanksto decreasel oa n exposure andmoralh azardb e h a v i o r andimprovestability.Nevertheless,C o o k ( 2 0 0 8 ) observest h a t a fewb ankss u f f e r e d froma moralh a z a r d i s s u e d u r i n g AsianFinancialC r i s i s

Therefore,t h e i m p a c t o f competitiono n banks t a b i l i t y b e c o m e s d o u b t f u l i n peri odo f financialcrises,when c ri se s changetherisk taking initiativeofbanks.Inthis situatio n,banksmayapply arisktakingpolicybenefitfromsafety- netsubsidiesortheriskyaversepoliciestodecline moralhazard.

Ontheaverage,crosscountryresearchpapersoffermixedfindingsregardingc o m p e t i t i o n - s t a b i l i t y relationshipbyusingdifferentsamples,riskmeasuresandcompetitionproxies. Nevertheless,thereisevidencethatboth marketconcentrationandmarketcompetitioncanc o e x i s t andt h a t t h e s e impactbanks t a b i l i t y throughv a r i o u s channels.Summaryt ableofsomeprevioustheoriesaswellaspopularmeasuresformainvariablesareshown inAppendix 1.

Hypothesisconstruction

Competition andbankstability

Ast h e reviewa b o v e , i t wasf o u n d t h a t t h e r e i s n o consensusi n t h e literatureo n re lationshipbetweencompetitivestructuresandbankstability.Competitionisimportantf o r efficiency,butmarketpowercanalsobringsomebenefits.Theriskofbanki n s o l v e n c y will bearchivedwhentakinginto account thesimultaneouseffectsof charginglowerratesfromcompetition ofbanks.

(2009),andsoonarguethatcompetitionreducesthechartervalueandraisebank‘sincentivefor moralhazard(e.g.shiftriskstodepositors),andthereby causem or e r i s k - t a k i n g activi ties However,if consideringthisargumenti n o n e direction,competitionals osimultaneouslydecreasestheinterestrateandbankswithm o r e competitorswillprovide bettercreditproductsforborrowers.Thishelpbankslimitt h e creditriskfor theirportfolioandtherebycontributetopromotebankstability(Boydetal.,2006;Noman,Geeand Isa,2017).

Asawhole,themargineffect(relatedtobank‘sprofitability)andtheriskshiftingeffect(relatedt o bankr i s ks ) couldsimultaneouslyinfluence o nt h i s nexusandi t is n o t straightfor wardtopredictitsmagnitudeintheASEANbankingenvironmentinpartduet o adversesele ctionandmoralhazardproblemsofbankshere.

Effectoffinancialcriseson thecompetitionandbankstabilityrelationship

TherehasmanyrecentstudiesinvestigatingtheeffectofcrisessuchasAsian1997andglo balfinancialc r i s i s o n bankstability.W i l l i a m s andNguyen( 2 0 0 5 ) f i n d t h a t t h e t i m e p eriodf o l l o w i n g t h e 1 9 9 7 Asianc r i s i s wasfeaturedbysignificantchangesi n t h e Asianb a n k i n g s e c t o r W Soedarmono(2013)explorest h a t duringt h e c r i s i s time,i f a bankexhi bitssomehigherdegreeofmarketpower,thiswillcontributetodecreaseriskofmoralhazardbeha vior.Ontheotherhand,Noman,GeeandIsa(2017)studyingASEAN-

5 banks,find thatthe impactoftheAFCwasmuch moresevereandintensivethantheGF C.Inparticular,theysupportthesubstantialeffectoftheAFCin1997-98oncompetition- banks t a b i l i t y n e x u s d u e t o e r o d i n g bankcapitalization.Int h e AFC,ASEAN-

5bankshaveabsorbedtoomuchriskandlosscapitalizationtoagreaterextent,whichmade themmorevulnerableorfragilefromlosingthechartervalueandfacehighermoralhazardinthefo rmofgamblingforresurrectionandlooting.Incontrast,duringtheGFC,ASEAN-

5b a n k s werel e s s resilientt o r i s k - t a k i n g initiativesd u e t o h i g h capitalizationandeffectivelymanagetheirloanportfolio basedontheexperiencesaccumulatedfromthepreviousAFC.Besides,Soedarmono(2013) alsoanalyzesimpacto f crisesin emergingmarketsinAsia findthat the1997–

1999periodshows that lowercompetitionhasa s t a b i l i z i n g effectw h i c h i s o p p o s i t e t o whattheyf i n d i n t h e overallperiodofstudyandin the2007–2009period.

H2:The1997Asiancrisisand2008globalfinancialcrisishaveimpacton competition- bankstabilitynexus.

No Author Title Methods Data Mainfindings

Competitionincreases stabilityasdiversificationacrossandwithinbothinter estandnon- interestincomegeneratingactivitiesofbanksincreas es

Fixedeffect,IV(2SLS)regress ionsetup Asampleof17,055banks from7 9 countries consistingofa mixofdevelopedanddevelopingc ountries over1994–2009

Anincreaseincompetitionwillhavealargerimpacton banks‘fragilityincountries withstricteractivityrestrictions,lowersystemicfragi lity,betterdevelopedstockexchanges,moregenerou s depositinsurance.

Bankcompetitionandfi nancialstability GMM regressionmodel,followingM artinez-Mieraa n d Repullo (2008)

Supportingcompetition-fragility‖view— b a n k s withahigherdegreeofmarketpoweral sohaveless overallriskexposure.

(2014) Bankcompetitionandfinancial stabilityinAsiaPacific GMM estimator,usingthemethodde velopedbyBharathandShum way( 2 0 0 8 )

1 4 AsiaPacific economies over2003- 2010,with4069observations.Th esubsampleforlistedbanksinclud es1500observations

Greaterconcentration fosters financialfragilityandthatlowerpricingpoweralsoin ducesbankriskexposureaftercontrolling foravarietyofmacroeconomic,bankspecific,regulatoryandinstitutionalfactors

1)andthreeclassesofrisk- neutralagents:entrepreneurs, banks,a n d depositors. aU- shapedrelationshipbetweencompetitionandth eriskof bankfailuregenerallyobtains

Does competitionimprovefinancials tabilityoftheb a n k i n g sectorin ASEANcountries

TwostepsystemGMMofArella no andBover(1995)andBlundell andBond (1998)

Highercompetitionmeasuredfosters financialstabilityofthebankingsectorcontrollingan u m b e r o f bankspecific,regulatoryand macro- economicfactors.Depositinsurancepromotesfinanc ialstability,whereas,activityrestrictionsa r e associ atedwithgreaterfragility.

Bankcompetition,crisis andrisktaking:Evidencefrome mergingmarketsinAsia

Ahigherdegreeofmarketpowerinthebankingmarke tisassociatedwithhighercapitalratios,higherincome volatilityandhigherinsolvencyriskofbanks.The 1997Asiancrisis thathasdirectlyaffectedAsianbanks,marketpoweri nb a n k i n g hasastabilizingimpact.

Modelspecifications

Generalspecification

Thiss t u d y investigatest h e impacto f competitiono n banks t a b i l i t y i n 7 A S E A N n ations‘commercialbanks.Thestudyfurtherresearchesthenon- linearitybetweencompetitionandbankstability,following theworkofMartinez- MieraandRepullo(2010),Fuetal.(2014)andBergeretal.

(2009).Therefore,t h e s t u d y appliest h e f o l l o w i n g generalregressionform/baseline specification.

Bankstability=F(Competition,Competition 2 ,BankControls,RegulatoryCon trols,MarcoControls) (i)

Intheequation(i),BankstabilityeachbankovertheperiodiscapturedbyZ- score,E q u i t y ratioandN P L ratio C o m p e t i t i o n denoteslevelo f competitiono r mark etp o w e r whichi s measuredw i t h b o t h non- structuralm e a s u r e o f competition,P a n z a r - R o s s e H - s t a t i s t i c andLernerindex,andstructuralmeasure ofcompetition, HHIindex.

Bankcontrolindicatesb a n k characteristicsc o n s i s t i n g o f b a n k s i z e (SIZE),assetsc omposition(LOAN),operationalefficiency(COREV),Loanlossprovisions(LLP).

BankRegulatoryControlandMacroControlarecountry- specificvariablesfortheq u a l i t y o f t h e r e g u l a t o r y ands u p e r v i s o r y framework andm a c r o - e c o n o m i c c o n t r o l Inparticular,b a n k r e g u l a t o r y controlvariablesc o n s i s t o f de positinsurance,a c t i v i t y restriction,capitalrequirementsandentryinto bankingrequirement.

2 0 0 9 globalfinancialcrisisalsoexaminedi n t h e interactiono f c o m p e t i t i o n o n banks t a b i l i t y o f A S E A N byincorporatingc r i s i s d u m m i e s Here,t w o crisesd u m m i e s arei n c l u d e d , whereo n e f o r c a p t u r i n g 1997-

98A s i a n financialcrisiswhichtakes1 i f t h e yeari s 1 9 9 7 and1 9 9 8 , otherwisez e r o ; and a n o t h e r o n e f o r c a p t u r i n g 2 0 0 8 - 2 0 0 9 globalfinancialcrisiswhichtakes1 if theyearis 2008and2009,otherwisezero.

Intheaboveform(i),thecoefficientvalueofCompetitionandCompetition 2 are examined,su c h as,i f Bankc o m p e t i t i o n i s proxiedbyH-statistic, a p o s i t i v e and significantcoefficientvalueo f b o t hCompetitionandCompetition 2 for Z-scoreand

Equityr a t i o asd e p e n d e n t variableprovideevidencet o s u p p o r t c o m p e t i t i o n - s t a b i l i t y hypothesis,wherehighercompetitionmakesbankstotakelessinsolvencyriskan dtobem o r e bankstability.O n t h e contrary,negativea n d significantcoefficientvalueo f b o t h

CompetitionandCompetition 2 provide evidencetofavorviewofcompetition-fragility. Inaddition,a differentsigno f b o t h coefficientsi m p l y t h a t non-linearU-shapedl i n k betweencompetitionandbankstability.

Firstly,t h i s studyestimatest h e f o l l o w i n g p a n e l regressionthati s c o n s i s t e n t w i t h t h e previousliterature (Boydetal.,2006;Soedarmonoetal.,2011):

Stabilityijt=α0+α1Competitionijt+α1Competition 2 ijt+ βBankControlBankControlijt+ MƟM arcoControljt+γCrisisDummyCrisisDummyt+εijt (1) Int h e equation(1),i = 1 … N , j = 1 … J , t=1…

T,N referst h e n u m b e r o f i n d i v i d u a l banks,Jrefersthenumberofcountries,Tdefinestheperiodoftime(years),andα,β, ,ƟM andγareestimatedparameters.

Thet h r e e d e p e n d e n t variableso f interesta r e consideredt o assessbankstability.The sei n c l u d e t h e r a t i o o f bankcapital,theratioo f n o n p e r f o r m i n g l o a n s andani n s o l v e n c y r i s k m e a s u r e T h e insolvencyr i s k isproxiedbynaturall o g a r i t h m o f t h e Z- score(Houstonetal.,2010;LaevenandLevine,2009andmanyothers).Theratioofbankcapitalis calculatedbytheratiooftotale q u i t y tototalassets(ETA).TheNPLsratioismeasuredbyratiob etweennon-performingloansandtotalloans.

Secondly,toinvestigatetheimpactofbothAsiancrisisandGlobalfinancialcrisisi n bank competition-stabilitynexus,specifythefollowingequation:

Stability ijt =α0+α1Competitionijt+α2CompetitionjtãAsiaCrisist+α3Competitio njtãGlobalCrisist+βBankControlBankControlijt+ƟMMarcoControljt+γCrisisDummyCrisisDummyt

08Globalfinancialc r i s e s , respectively.T h e i n t e r a c t i o n t e r m s a r e consideredasindicatorofBankCompetition/Marketpower,adjustedforeffectofcrisesi n a givenmarket.

Thisequationaddt h e interactiontermsofthemainexplanatoryvariableforbankco mpetition/marketp o w e r , w i t h crisisd u m m i e s t o e x a m i n e c o m p e t i t i o n - s t a b i l i t y n e x u s

Specificregressionequations

Thirdly,toanalyzetheeffectofbankregulatorywith thenexusbankmarketpower-r i s k t a k i n g behavior,specifyingthefollowing equation:

Stabilityijt=α0+ α 1 Competitionijt+ α 2 Competitionjtã RegulatoryControl ijt + βBankContro lijt+ƟMarcoControl jt +γCrisisDummy t +ε ijt (3)

Regulatory control is a country-specific factor that influences market entry conditions and the quality of the regulatory and supervisory framework This study examines indicators from the World Bank Survey on Bank Regulation and Supervision, focusing on the effects of depositor protection schemes and barriers to entry, such as banking requirements, capital requirements, and activity restrictions for financial intermediaries Additionally, the interaction terms are analyzed as indicators of bank competition and market power, adjusted for entry conditions and regulatory factors in a given market.

Insum,thekeye x p l a n a t o r y v a r i a b l e s includeindicatorsofpricecompetition atthebank–level(LernerI n d e x ) andH - s t a t i s t i c , H H I ( a t t h e c o u n t r y - l e v e l ) T h e Leneri n d e x measuresthemarketpowerofabank;whereasH- statisticmeasuresforintensityofcompetitionandHHIindexmeasurestheconcentrationofba kingmarket.Besides,theseaboveequationsalsoinclude, ascontrolvariables, bank- levelbalancesheetvariablesatt h e bank- level,indicatorsofmacroeconomicandmarketentryconditionsatcountry-

Descriptionof thevariables

Dependentvariables

Inorder tostudythe nexusbetweenbankstabilityandcompetition,it is necessarytoselectsuitablemeasuresofbothbankstabilityandcompetition.Bankstabilityi sf r e q u e n t l y measuredi n theliteraturesinnegativ e termsuch assystematic and/ ori n d i v i d u a l bankdistress,becauseitthreatsfinancialsafetynetofabankingsystem(Bech,D emirguc-

Kunt,& Maksimovic, 2004).Mo r e o v e r , severaldistressofsy st em ic ba nk i ng distressb eginswithanindividualbankdistress(Beck,2008).Similarly,failureofalargebankduetoliqu idity shortagespilloverstotheentirebankingsectorasobservedinthe recent2007-

08globalfinancialcrisis.Therefore,this studyusesth e following differentr i s k e x p o s u r e indicatorsasdependentvariablest o p r o x y forbankstability:t h e Z- scorei n d e x asaninversem e a s u r e o f overallbankr i s k / i n s o l v e n c y bankr i s k ; t h e v o l u m e o f nonperformingl o a n s t o totall o a n s (NPLs)t o accountf o r l o a n portfolior i s k5,andt h e e q u i t y to totalassetsratio(E/TA) forthebank‘scapitalizationlevel.

3.2.1.1 BankZ-score–measureof banksolvency/defaultrisk/bankbankstability

ThebackgroundtheoryoftheZ- scoreisbasedontheworkofRoy(1952),whichmeasuresthedistanceofabankfrominsolve ncy.Subsequently,mostresearchersused theZ- scorei n d e x asthem a i n p r o x y tot h e banks o u n d n e s s (asi n e.g.,Berger,KlapperandTurk- Ariss(2009);TBecketal.(2009);LaevenandLevine(2009),Demirguc-

KuntandHuizinga(2010);H o u s t o n etal.(2010);Soedarmonoetal.(2013);Beck,D e Jonghe&

Schepens(2013)andSchaeckandC i h á k (2014)andmanyother).Therefore,t h i s s t u d y alsous esZ-scoreindexasthe primarymeasureofbankstability.

Theriskofinsolvencydeterminestherisk thatabankunableto meet theobligationsbecauseithasanegativenetvalue.Thiscanhappenwhenabanksufferssomeda magefromitsassetsduetodebtsonsecurities,loans,orotherbankingactivities,butthenth einstitution'scapitalisenoughtomakeupforthoselosses.Inthatcase,thebankcouldnotfulfillits obligationsdefaultsandloses itschartervalue.

Hence,i n s o l v e n c y i s a conditioni n whichl o s s exceedsequity,s u c h a s : - π> E,whereπstandsforprofitandEstandsforequity(Roy,1952).Thendividingthisfunctionby A(totalassets),get:E/Achi2=0.0000), suggesting that random errors are likely correlated with one or more regressors Consequently, there is substantial evidence that the Fixed Effects Model is the more suitable approach for analyzing leverage ratios, leading to the conclusion that the Fixed Effects Model should be selected.

StageLeastSquares(2SLS)w i t h f i x e d effectcorrectionsi n IVs t a t i c m o d e l ForW a l d t e s t , t h e F-statisticsw i t h p- valueo f approximately0 indicatet h a t allo f t h e s e m o d e l s appearendogenousproblemsa nd2SLQispreferredthanFEbyaddressingendogenousproblemsbyspecifyinginstrumental variables.

Firstly,forWaldtest,theF- statisticsishighlysignificant,confirmingthatthefixedeffectsmodelissuperiorto thepooledregressionmodel.Secondly,themodifiedBreusch-

PaganLmtestforrandomeffects,theestimatedchi-squarestatisticswithp-valueclosest o z e r o helprejectHo.Inthiscase,REM ispreferredto theOLS.

The Hausman test is used to determine which method, fixed-effects model (FEM) or random-effects model (REM), is more suitable for the dataset under analysis The null hypothesis posits that there is no systematic difference in coefficients (REM) Results from the Hausman test indicate a strong rejection of the REM, evidenced by a very low p-value (Prob > chi2 = 0.0000) This suggests that random errors are likely correlated with one or more regressors, reinforcing the conclusion that the fixed-effects model is the appropriate choice for analyzing leverage ratios Therefore, we opt for the fixed-effects model in our regression analysis.

StageLeastSquares(2SLS)withfixedeffectcorrections.ForWaldtest,theF- statisticswithp- valueo f a p p r o x i m a t e l y 0 indicatet h a t allo f t h e s e m o d e l s appearendogenousproble msand2SLQispreferredthanFEbyaddressingendogenousproblemsbyspecifyinginstrumental variables.

Resultsanddiscussion

Theeffectcompetition on stability

Table-9aandtable-9bdemonstratebank- level2SLSIVregressionsw i t h robuststandarderrorsc l u s t e r e d att h e c o u n t r y levelt o cor rectf o r w i t h i n - c o u n t r y serialcorrelation.Here,authorestimatesninesmodelsintable9a&9b,whereZ- score,capitalratioandNPLsratioareconsideredasdependentvariableinmodel(1-3),(4-

9)respectively,andp r o x y o f competition,s u c h asLerneri n d e x i n model( 1 ) and(4);H - s t a t i s t i c isusedinmodel(2)and(5);andfinally,model(3)and(6)useHHI(notethat

Thediagnostict e s t s f o r m o d e l regressionsareprovidedatt h e underneatho f t h e t a b l e 9 a & 9 b T h e significantvalueo f Wooldridget e s t , Breush-Pagan/Cook-

Inordertoaddresstheseissues,thisstudyadoptsinstrumentvariabletechnique.Asa first attempt,thestudyrunsFirstStageF- teststatisticsusing2SLSregressiontocheckt h e relevanceo f t h e instrumentalvariables.

A s a result,t h e significantvalueo f F- testwhichrejectsthenullhypothesisindicatesthatthevariablesare notexogenousorinotherwords,theinstrumentsareweakandinvalidin2SLSregressionsandfi xedeffectinstrumentalvariableestimatorarealsolikely tob e biasin thewayofOLSestimat ors.Therefore,thestudyusespaneldatamodel2SLSafterwithin(FE)transformation(IV/ FEestimationforstaticmodel),departsfromUhdeandHeimeshoff(2009)andSchaeckandC i h á k (2007).

On theother hand,TheHansen‘sJstatistictests thevalidityoftheinstruments used,theinsignificantvalueofHansen-Jtestensuresthevalidityofover- identifyingrestrictionindicatingt h a t i n s t r u m e n t a l variablesu s e d f o r handingendogen ousp r o b l e m arev a l i d Thus,instrumentsareuncorrelatedwitherrortermandsolvedth eendogenous problem.Similarly,heteroscedasticity issueisalsoaddressed,because,pre senceofheteroscedasticity,over- identificationrestrictionswouldnotbevalidated(Baum,Schaffer,

Table-9a.TheeffectofcompetitionmeasuredbyH-statistic,LernerindexandHHIonZ- scoreandequityratioasmeasureofbankstabilityin ASEANfrom1995-2015.

The model in Table 9 demonstrates that competition, as measured by the H-statistic alongside control variables, significantly influences the Z-score Regression findings indicate a positive and significant relationship between the degree of competition in the banking market and bank stability, evidenced by three proxies: the non-performing loans ratio, bank-level capitalization ratio, and the Z-score index This suggests that increased competition positively affects pricing power and, consequently, bank risk-taking behavior.

Thesedo not supportthe―charter value‖ hypothesist h a t thefranchisevalueislikelyerodedinamorecompetitiveenvironment,th enencouragebankstoraisetheiroverallriskexposure,orinotherwords,italsodiscouragesbank ingi n s t i t u t i o n s t o undertakem o r e r i s k s t o increasereturns.M o r e specifically,t h e resu ltsofmodel(2),(5),

(8)areconsistentwithBoydandDeNicoló(2006)andNoman,GeeandIsa(2017)anddifferfr omBeck,DeJongheandSchepens(2013),Ariss(2010) andXiaoqing(Maggie)Fuetal. (2014)thatbank- levelmarketpowerincreasesthes t a b i l i t y ofbankingsector inemergingeconomies,o f coursein cl ud in g ASEAN region.Highercompetitionfurthererodesbanki n s o l v e n c y r i s k andcreditr i s k andalsoassociatedwithanincreaseincapitalratios (ETA).

Inbrief,theresultsclaimthatthecoefficientofH- statisticispositiveandsignificantimplyingt h a t anyenhancei n competitionlevelmakest h e A

S E A N commercialbanksm o r e financialstable.O n t h e contrary,t h e m o d e l ( 3 ) u s e s HHIi n d e x asa p r o x y o f traditionalcompetitionthroughconcentration,theresultsshowth atthecoefficientofHHIi s negativeandsignificant,suggestingthathighconcentrationinlowc ompetitivemarketdecreaseslnZ-scoreorbankstability.

The model utilizing the Lerner index as a proxy for competition yields findings that diverge significantly from prior predictions, revealing a positive and insignificant coefficient This raises questions about the correlation between market power and competition in banks, supporting the argument by Xu, Rixtel, and Leuvensteijin (2013) that market power is negatively related to competition but positively related to concentration Additionally, the results align with Berger et al (2009), who identified a positive relationship between bank-level Lerner indices and capital ratios.

On theotherhands,thecoefficientofLERNERin model(3)issignificantlypositive.Theseresultsshowthatbanksinlesscompetitivemarketsarea bletoholdhighercapitalratios,contributetoc o v e r anincreasei n bankr i s k t a k i n g t h a t i n t u r n exacerbatesbank defaultrisk.Indeed,thisstudyobservesthatbanksinlesscompetitivemarketsareabletoincreas et h e i r e q u i t y t o totalassetsratio(ETA).

Moreprecisely,t h e r e s u l t s providea straightforwardi n t u i t i o n o n s u c h empiricalresu lts,wheret h e degreeso f capitalizationaresufficienttocoverbanks‘risk- taking.Theconsequencesofthecrisis,ASEANbanksbrings o m e r e g u l a t o r y reforms t r a t e g y i n t h e f o r m o f consolidation,r e - r e g u l a t i o n andinternationalintegrationandtheregion.SoutheastAsiainparticularandAsi aingeneralhasexperiencedr a p i d growthi n t h e c o n s o l i d a t e d banksi s 2 5 % peaki n

In their 2003 study, Berger and Mester highlighted that bank consolidation has strengthened market power and increased capacity by facilitating banks' expansion into various products across national borders This trend has led to the emergence of "too big to fail" banks, which may adopt higher ethical risks by accepting more risk for greater profits In challenging situations, these large banks can rely on government bailouts, making them more willing to share risks that can be offset by sustained funding Consequently, the findings suggest that increased market power correlates with reduced overall risk.

6).Thenegativeands i g n i f i c a n t coefficiento f HHIi n d e x i n m o d e l ( 6 ) statest h a t hig hconcentratedmarketinducesbanksw i t h l o w marketpowert o h o l d m o r e e q u i t y capitalwh ichinturnmakesthem financiallystable.

Table-9b:TheeffectofcompetitionmeasuredbyH- statistic,LernerindexandHHIonN P L ratioasameasureofbankstabilityin ASEANfrom1995-2015.

Wooldridgetest(P-value) 5.089(0.0253) 8.420(0.0042) 8.474(0.004) Breush-Pagan/Cook-Weisberg 2210.58(0.00) 2138.55(0.00) 2115.21(0.00) test(P-value)

ThispartalsoconsidersthelinkofcompetitionandbankstabilitythoughNPLratioasaprox yofstability.Theresultsareshownintable-9b.The model(8) oftable- 9bpointso u t thecoefficientofH- statisticisnegativeandsignificantimplyingthatanyincreaseincompetitioninducesbankst otakelessinsolvency riskintheirloanportfolio.Similarly,t h e coefficiento f H H I i n t h e m o d e l ( 3 ) d e m o n s t r a t e s p o s i t i v e ands i g n i f i c a n t whichsuggesttha thigh concentrationraisescreditriskand moreriskyloanportfolio.

However,Lernerindex‘scoefficientshowsnegativesignificantlyi n model(7)whichp o i n t s o u t t h a t i n ASEAN‘scommercialbankingenvironment,anyenhancei n marketp o w e r alsoerodest h e n o n - p e r f o r m i n g l o a n s ratioo r t h e creditr i s k o f banks,likewiseresultintermofH- statistic(model8)andcontrastonfindingofHHI(model9).T h i s simultaneously suppor tsopinionthat marketpower,competitionandconcentrationarereallycorrelated.

Ont h e o t h e r hand,t h i s s t u d y a l s o incorporatet h e quadratictermoft h e marketp ower,competitionandconcentrations u c h asLernersquare,H - s t a t i s t i c square,H H I - squareascontrolv a r i a b l e s i n ordert o f i n d t h e n o n - l i n e a r i t y betweenc o m p e t i t i o n ands t a b i l i t y throughseveralvariousmeasurec h a n n e l s , f o l l o w i n g t h e worko f Bergeretal.(2009),Tabaketal.(2012),andFuetal.

(2014).Asaconsequence,suchrelationshipsarealtered,albeitnotallsignificant(insignificantva luefoundinmodel(1),(4),(7)regardingt o Lernerindex.Thisindicatesthatcompetition- stabilitynexusisaU-shapedlink,inlinewith Martinez-

Mieraa and Repullo (2010) and Hakenes and Schnabel (2011) contribute to the understanding of unmarked coefficients of market power and concentration, highlighting their relationship with market power and competition Notably, H-statistics exhibit a negative correlation with Z-score and ETA, indicating an inflection point This suggests that lower pricing rates influenced by competition levels or bank market power have simultaneous effects on overall risk, aligning with the findings of Berger, Klapper, and Turk.

Thus,thestudyfindingssupporttheoriginalhypothesisofanon-linearorU- shapedmannerbetweencompetitionandbankstability.Theeffectofanyenhanceincompetition couldgoeitherways,dependingonotherfactorsandtheexistinglevelofcompetition.Ins u m ,competitive–fragilityviewandcompetition–stabilityviewaresupposedthatboth

60 aren o t o p p o s i t e p e r d i t i o n s , andr a t h e r b o t h cana p p l y simultaneouslyif t h e r i s k - t a k i n g canbehedgedbyahighcapitalbuffer.

Theimpactof

Thispartconsiderst h e impacto f crisesi n c o m p e t i t i o n - s t a b i l i t y n e x u s eacht i m e separately.Thesefindingswereexhibitedintable- 10thattheimpactoftheAsianfinancialcrisiswass e e m e d m o r e severeandi n t e n s i v e f o r

A S E A N b a n k s Duringt h e Asianfinancialcrisis,ASEANbanksabsorbedexcessiveriska ndlosttheircapitalizationt o agreaterextent,whichmadethemfragilefromlosingcharterv alueandfacinghighermoralhazardsintheformofgamblingforresurrectionandlooting(Co ok,2008).Morespecifically,i n l e s s c o m p e t i t i v e market,t h e emergenceo f 1 9 9 7 /

1 9 9 8 Asianfinancialcrisisincreasedtheinsolvencyrisk(observedbymodel1)andmadelow ercapitalization(model4andmodel5),aswellastheincreaseofthenon- performingloans(model7)inbanksystematt h a t t i m e , highlightingp o s s i b l e moralhazard problemsinAsianbanks.Undersuchcircumstances,lowermarketpowerinthebankingsectorm aycontributetodecreasemoral hazard,atleastin thecrisisperiodthathasdirectlyaffectedAsianbanking.

Again,table10showsestimationresultsofmodel(3)whenaddingtheinteractiontermbe tweenLERNERandACRISISorGCRISISdummyasane x p l a n a t o r y variable.S i m i l a r l y asabovep a r t , LERNER* ACRISIS,LERNER*GCRISISa r e treatedasanendogenousvaria ble.ResultsonTable10indicatethatLERNER*ACRISISiss i g n i f i c a n t l y andnegati velyinmodel(1),

(4).Thesefindingsshowthatduringthe19971998crisis,higherbankmarketpoweri s alsop ositivelyrelatedt o banki n s o l v e n c y riskandthe non-performingloansratio.

Next, a decrease in the capitalization ratio also shown.

Duringa globalf i n a n c i a l crisist h a t f o r m s ane c o n o m i c downturn,i t i s p e r c e i v e d t h a t bankstendtodecreaseloansandimprovecapitalratios(model5,6)sincecapitalisexpe ctedtobufferagainsttheshocksofthecrisisandtoraisebanks‘competitiveadvantageinamarket (BergerandBouwman,2009).Greaterriskaversionofbankscant h u s moderatemoralhaz ardintermsofexcessivelending.ThiscanbeexplainedbyBrownbridgeandK i r k p a t r i c k

( 1 9 9 9 ) t h a t i n crisisperiod,bankscanb e h a v e i m p r u d e n t l y becauseamassived eclineinbankcapitalratiosandanincreaseinmaturitymismatch.Thisisbecausesuchcaseser odethechartervalueofbanksencouragingriskyo r fraudulent.

Ins u m , banksi n l e s s c o m p e t i t i v e marketss t i l l s h o w greatercreditrisks(n on-performingloanratio)butshowinganotstatisticallysignificantimpactonz- scorewhichindicatesinsolvencyriskorbankstabilityduringthe2007-

2008crisisstage(model1).Ino t h e r words,coefficientsrelatedt o Z- scorei n m o d e l 1 , 2 whichc a p t u r e t h e p r i m a r y p r o x i e s forcompetitionarenotsta tisticallysignificantresult.Thisresultcanbeexplainedbythefactthatthe2007-

2008globalfinancialcrisis stagedidnotdirectly affectAsianbanks(Standard&Poor,200 8).Besides,themanifestandstatisticalsignificance‘slevelo f coefficientoft h e A F C andc o m p e t i t i o n p r o x y interactiont e r m i s higherandm o r e significantt h a n GFC‗sone.T h i s contributest o i m p l y t h a t AFCseemst o havegreaterimpacton ASEANenvironment inrecent30yearsthanGFC.

0 8 crisism a d e capitalratiorises.T h i s canb e explained byinrecessionstage,banksanddepo sitorstendto holdcapitalandfearsofinvestment.This alsocontributestothe non- performingloansratiofalls.

Insum,duringGlobalfinancialcrisis,ASEANbankswereseemedlessresilienttorisk- takingduetotheir capitalizationisnotenoughtocompensatefor theriskalthoughl o a n portfoliomanagementbasedo n t h e experienceso f t h e precedingAFC.However,

―too-big-to- fail‖isseemedgainsomebenefitsbytheirincreasedcapital.Thisisshownfromm o d e l 3 ,

6 and9 (regressionm o d e l s captureH H I i n d e x ) i m p l y t h a t enhancei n capitalratiosi n m o r e concentratedenvironmenti s enought o offsett h e impacto f r i s k t a k i n g onbankins olvencyriskanddecreasethe non-performingloans.

(2013)arguet h a t r e g u l a t o r y frameworkmayrenovatet h e r el at io ns hi p betweencompetit ionandstability.Hence,t h i s s t u d y alsocontrolledf o r s o m e policyconditionssuch asact ivity restriction, depositinsurance,capitalrequirementsandentryi n t o bankingrequirem ents andresultsareshown indetailinAppendix5A, 5Band5C.

Itwasfoundthatactivityrestrictionspromotebankstobemorecapitalized,andtobec omemoreinvolvedininsolvencyrisk- takinginitiativesiftheirfindingsofthediversifiedclientsoropenbusinesslinesarepermitted.I nbrief,thisregulationhelpbettercapitalandreducethecreditrisk,thushelpmorestabilizeth ebankmarketregardlessofwhetherthatmarketis competitive orfocused.This findingisdifferentwithAngineretal.(2014),whoadvocatedforremovingactivityrestrictions to fostercompetition.

TheseresultsareinlinewiththeresultofUhdeandHeimeshoff(2009),whoclaimst h a t re strictedmarketentryi s l i k e l y t o i n c r e a s e banks t a b i l i t y i n WesternEuropeanbanking.

A S E A N banksbyp r o t e c t i n g banksfroma r u n , assuggestedbyD i a m o n d andDybvig(1 983).Besides,depositinsuranceissignificantlycorrelatedwithahigherprobabilityofbankr uptcy,favoringofthemoralhazarddebateregardingexcessiverisk- takingwhenafinancials a f e t y neti s available.Again,t h e f i n d i n g i s similarto t h e findings o f LaevenandLevine(2009).

Minimumregulatorycapital-to-assetsratiosetbyeachcountry‘spolicymakersisfoundn o t t o haveasignificantimpactonthis competition-stabilitynexus.

Therequirementsforbankinglicensesfortypesofentryofthebankingsectorwhoseeffect demonstratedintablesinappendix5A,5B,5Cthatmoreentryrequirementscontributetolowerth eportfoliorisk,enhancecapitalizationandmorestablefinancialmarket.

Insum,consideringmarketentrycondition,thefindingsdemonstratet h a t activityrestric tionsaresignificantlyandnegativelyc o r r e l a t e d witht h e ratioofNPLs,whichimpliesthat alowerdegreeofcompetitive,greateractivityrestrictionspressuretoencouragebankscontrolb ettert h e N P l s r a t i o andcreditrisk,contributetodeclinefragilityfor bankingsystem.

Bank-levelandcountry-levelfactorson competition-stabilitynexus

Regardingt h e impacto f bankingcharacteristics,firstly,t h e significantlynegativecoeffi cientforbanksize inallofmodelsshownintable9aindicatesthatsmallerbanksimprovefinancialsoundnessandl esssensitivetodefaultrisk.Thiscouldbypartlyk e e p i n g lesscapitalincomparisontolarge banks.

Secondly,thecoefficientofLOANissignificantlynegativeinmodel(8)andpos it iv e i nmodel(1)-

Research indicates that a higher level of intermediation, represented by a larger ratio of net loans to total assets, correlates with reduced credit risk and improved financial soundness for ASEAN banks Specifically, banks with a greater percentage of loans relative to their total assets tend to exhibit lower capitalization and credit risk, contributing to greater stability Larger banks, in particular, show significantly fewer non-performing loans (NPLs) and possess better loan portfolio quality, potentially due to enhanced monitoring technologies Additionally, factors such as loan loss provisions (LLP) and the cost-to-income ratio negatively impact bank stability.

Amongthecountry- specificcontrolvariables,inflationisfoundnoeffectwithi n s o l v e n c y risk,andrealGDPgro wthhasastabilizationeffectbydiminishingrisk-takinginitiativesandimprovingcapitalbuffer.

Empirical findings indicate that greater economic growth leads banks in less competitive markets to decrease their equity-to-total asset ratio (ETA), which simultaneously heightens insolvency risk and results in riskier loan portfolios, contributing to increased bank fragility Specifically, higher economic growth allows banks to reduce insolvency risk, improve their equity-to-total asset ratios, and manage non-performing loans (NPLs) more effectively In countries with stronger economic growth, lower bank competition tends to relieve capital ratios This research diverges from existing literature on the procyclicality of bank capital buffers, suggesting that banks maintain lower capital levels as economic growth accelerates Consequently, greater economic expansion can significantly influence how bank competition affects capital ratios.

Question1:Doesc o m p e t i t i o n a ffectbanks t a b i l i t y inA S E A N countries?

Thes t u d y findingss u p p o r t t h e neutralv i e w o f Martinez- MieraandRepllo( 2 0 1 0 ) th at suggestsa non-linearorU- shapedmannerbetweencompetitionandbanks t a b i l i t y inA S

E A N region.Theeffectofanyenhanceincompetition cou ldgoeitherwaysandindifferentstagesdepending ono t h e r factorsandtheexistinglevelofcompetition.Insum,competit ive– fragilityv i e w andcompetition– stabilityv i e w a r e s u p p o s e d t h a t b o t h aren o t o p p o s i t e p e r d i t i o n s , andratherbothcanapplysimultaneou slyiftherisk-takingcanbehedgedbyahighcapitalbuffer.

Question2 : Doest h e 1 9 9 7 Asianc risisand2 0 0 8 globalfinancialcrisesi mpactonrecentcrisesontherelationsh ipo f c o m p e t i t i o n andstability?

1997Asiancrisisand2008globalfinan cialcrisish a v e impacto n competitio n-bankstabilityn e x u s

The1997/1998Asianfinancialcrisiswasasevereandintensivee ffectw i t h m a k i n g lowercapitalizationandt h e increaseoft henon- performingloansratio aswellasincreasedtheinsolvencyri skinbanksystem,highlightingp o s s i b l e moralhazardprobl emsinAsianbanksatthatt i m e

However,coefficientso f interactiont e r m s betweenp r i m a r y measuresf o r c o m p e t i t i o n andbanks t a b i l i t y a r e found n o t s t a t i s t i c a l l y significant.T h i s r e s u l t can b e explained byt h e factt h a t t h e 2 0 0 7 -

2 0 0 8 globalfinancialcrisisstaged i d n o t d i r e c t l y affectA sianb a n k s Thecapitalizationwasfoundtoberisingduringt he2007-

2008periodi n m o r e concentratede n v i r o n m e n t s d u e t o psychologicalfearsofinvestment,therebyc o n t r i b u t e to baddebtand stabilizebanks.

Robustnesschecks

An u m b e r o f robustnesschecksw e r e c o n d u c t e d f o r mym a i n results.Firstly,t h i s workre- estimatedt h e m a i n resultseliminatingquadratictermo f co mp et i ti on f o l l o w i n g t h e wor ko f Fuetal.

( 2 0 1 4 ) andKasmanandK a s m a n (2015).T he re su lt s demonstratet h a t t h e m a i n finding sofbankstability,effectc o m p e t i t i o n i s r o b u s t eveni n absento f quadratictermofcompet itionmeasure.Here,thisstutyalsorunstaticfixedeffectand/ orrandomeffectmodelbasedonHausmantestresultsfollowingtheworkofAgorakietal.

(2014).T h e findingsarealsof o u n d t h e competitionincreasesbank stability inthebanki ngsectorinstatic modelsaswell.T h i s resultisnotreportedhere,butthisisavailableifrequires.Inaddition,insteadofHHIasmeasur eo f concentrationt h e worku s e d largethreebanksmarketsharei n l o a n market( C R 3 ) andf o u n d t h e s i m i l a r evidence.T h e r e s u l t s arereportedi n A p p e n d i x 6 T h e coef ficientofCR3alsofoundnegativeandsignificantforlnZ- scoreasmeasureofbankstability.Thus,theresultsrobustlyconfirmthefindingsthatcompetit ionissupportivefort h e bankstabilityin ASEANbankingsector.

Ontheotherhands,thecoefficientofCRthatmeasuredbytheassetconcentrationo f t h e threelargestbanki s significantlyn e g a t i v e atm o d e l (1),(3),

Excessive concentration in banking markets can lead to lower capital ratios, which may increase banks' risk-taking behavior The use of efficient estimation methods like 2LSQ helps address endogenous issues, indicating that high concentration may correlate with a higher non-performing loans (NPL) ratio However, the positive coefficient of the squared term in models suggests a non-linear relationship between concentration and bank stability Additionally, combined variables such as CR3_ACRISIS and CR3_GCRISIS show significant positive effects, indicating that greater concentration may reduce the risk in loan portfolios Consequently, banks may hold higher capital or employ other strategies to mitigate risks, suggesting that recent mergers and acquisitions in the banking sector could contribute to a more stable banking system during economic downturns.

Conclusion

2015.Threemeasuresofbankstabilitywereapplied,s u c h asZ- scoret o p r o x y stability,N P L r a t i o t o p r o x y r i s k ande q u i t y ratiot o p r o x y capitali zation.M e a n w h i l e , competitionwasmeasuredthroughb o t h n o n - s t r u c t u r a l approaches( P a n z a r - R o s s e H- statisticandLerneri n d e x ) andstructuralapproaches(Herfindahl-

Hirschmani n d e x whichp r o x y forb a n k concentration),andregressedt h e m separatelyo n fi nancialm o d e l s T h i s researcha l s o analyzest h e influenceso f t h e t w o crises( c o n s i s t i n g o f 1 9 9 7 Asiancrisisandglobalfinancialc r i s i s ) ands o m e bankingr e g u l a t o r y onthiscompetition- stabilitynexus,throughthat,afewsuggestionswouldbeproposed.

Repullo (2010) explores the complex relationship between competition and stability in the ASEAN banking sector, revealing a non-linear, U-shaped dynamic This suggests that after reaching an inflection point, the marginal effect of competition—known as the competition-fragility view—begins to dominate the risk-shifting effect, which is part of the competition-stability view Excessive competition drives banks to lower interest rates for borrowers, thereby reducing moral hazard, risk exposure, and adverse selection, ultimately enhancing bank stability However, this competitive pressure can also erode banks' market power and profit margins, leading them to assume higher loan portfolio risks, which contributes to instability in the banking market These findings underscore the necessity of balancing competition and bank market power to achieve stability, particularly at specific levels and during certain periods.

68 controllingforanarrayofbank- level,macroeconomic,crisisandmarketentryconditions.Inaddition,ther e s u l t s suggestthats mallerbanks i z e m a y declineo v e r a l l r i s k ands o , improvefinancialsoundness.Inter mofmarketentryconditions,itwasfoundthatmorea c t i v i t y r e s t r i c t i o n s o r s t r o n g e r depositi n s u r a n c e a r i s i n g f r o m legalrequirementscancontributetobankingstabil ity.Unsurprisingly,thebanksareexhibitedthattheyaremorevulnerablein1 9 9 7 c r i s i s Furthe rmore,t h e e f f e c t o f t h e 1 9 9 7 / 1 9 9 8 Asiancrisiso n thebankcompetition- stabilitylinkseemsto bealittlestrongerthantheglobalfinancialcrisis.Besides,thecapitalizationwasfoundtoberising duringthe2007-

2008crisisstageduetopsychologicalhesitationininvestinginotheractivities.Besides,higher economicgrowthdeclinesr i s k t a k i n g b e h a v i o r andenhancess t a b i l i t y ofb a n k i n g sys tem.Excessivel o a n l o s s provisionsandcostarealsopotential contributors toinstability.

Ontheotherhand,theresultsalsomanifestthatsmallbanksaremoreefficient,andt h e i r higherlevelofintermediationimproveb a n k soundness.Unsurprisingly,t h e banksareexhibite dtolostcapitalizationandmorevulnerableinAsiancrisis.Thiscrisiserodedcapitalizationandi ncreaseddefaultriskwhichunderminethefinancialsoundnessofthebankingsector.Further more,theimpactofthe1997/1998Asiancrisisonthebankc o m p e t i t i o n - s t a b i l i t y l i n k seemst o bea l i t t l e strongert h a n t h e globalf i n a n c i a l c r i s i s Besi des,thecapitalizationwasfound toberising during the2007-

2008period inmoreconcentratedenvironmentsduetopsychologicalhesitationininvestin ginotheractivities.Besides,highereconomicgrowthdeclinesrisktakingbehaviorandenha ncesstabilityofbankingsystem.

.Intermsofregulationsandinstitutions, thefindingsindicate thattougherentryrestrictionsm a y e n h a n c e bankstability,w h e r e a s strongerd e p o s i t i nsuranceprogramsn e g a t i v e l y affectfinancialsoundness.Notsurprisingly,banksar econsideredtobemorefragileduringtherecentfinancialcrisisperiod.

Policyimplications

Thesefindingsalsoc o n t r i b u t e t o proposes o m e p o l i c y recommendationsf o r regula torsofASEANbanks,toenhancebankstabilityandthesuccessfulimplementationo f theASEANBankingIntegrationFramework,orABIF.Asbankconsolidationisfoundt o haveasignifica ntimpactonbankstability,consolidationmaybeanappropriatepolicyt o reducecompetitionin

69 thebankingindustry.Ontheother hand,theresultssuggestthatsmallerbanks i z e m a y declineoverallr i s k ands o , i m p r o v e financial soundness.Thus,eachASEANcountryshouldapplyamannerthataverysmallgroupoflargeb ankss t r o n g i n c a p i t a l s , markets h a r e c o e x i s t w i t h o t h e r smallerbanksw i l l helpimpr ovethebankstabilityofthecountry.

Int e r m o f markete n t r y conditions,i t wasf o u n d t ha t m o r e ac ti vi t y restrictionso r st rongerdepositinsurancearisingfromlegalrequirementshasastability- enhancingimpact.Hence,i t s h o u l d b e m o r e e x p l i c i t i n t h e regionandbankoperationss h o u l d benarrowedt o p r o d u c t s p e c i a l i z a t i o n o r in o t h e r w o r d s , l i m i t i n g banks‘s c o p e to enhancet h e i r portfoliointhecompetitivemarket.Besides,entryregulationsshould bestrictertoguarantee riskor theadverseeffectsoneconomicstability.

Appropriatep o l i c y s h o u l d b e enactedt o p r o m o t e competitionata c e r t a i n lev el,whichhasa regionals t a b i l i z i n g effect,aswella s e f f i c i e n c y oft he b a n k i n g system,byt a k i n g careoflargebanksintheformofa―toobigtofail‖policy.Thisisbecause,largebanksm ayhaveacontagioneffectfortheentiremarket,andthefailureofalargebankm a y makethew holebankingmarketfragile,asbanksareinterconnected.

This studyalsocould notavoidcertainrestrictions, typicallydatabase,measures andmethodology.T h e s a m p l e o n l y capturest h e commercialbanks,i g n o r i n g o t h e r b a n k i n g activitiessuchascooperativebanks,realestateandmortgage banks.Investmentbanksaren o t includedinthesample,toensuresomehomogeneity inth etypeofandtoallowfordatacomparability.Besides,someregulatoryvariablecannotbecoll ectedadequatelyduet o lackofreportingbycountrieswhichthenleadstoerrormeasurementin thecalculationo f thevariable.Limitingmeasureofbankconcentration:HHIdeposits(A coun try-levelindicatorofbankconcentration,measuredbytheHerfindahl–

HirschmanDepositsIndex,w i t h higherv a l u e s i n d i c a t i n g greatermarketconcentratio n(Berger,2009).O t h e r l i m i t a t i o n s ofthiswritingthatitdoesnotanalyzeinfluenceof foreignbanksatthehostcountries.Itnot,thatmayprovideawedgebetweenthemeasurementof marketpowerford o m e s t i c versusinternationalbanks.

Abovefindingsrevealt h a t t h e Europeanb a n k i n g s e c t o r i s s t i l l e x t r e m e l y fragmented.However,itisfeaturedbyarangeofentrybarriersthatneedfurtherexploration(E C,2007).Datarangeshouldbedividedintotwoorthreestagestoanalyzem o r e cl ea rl y thi sc o m p e t i t i o n - s t a b i l i t y onAS E A N regionsi n observedyearsaswellasv e r i f y specifytheimpactofcrisesa ndpolicies.

Thelaterresearchshouldbemoreextensiveonresearchdata.Secondly,thetypeofbankst oresearchshouldbeexpanded.Besides,theinflectionpointwhichisa p p r o x i m a t e l y the4thQuartile ofbankcompetitionindexdistributionalsoshouldalsobecalculated.Fourth,w e s h o u l d fu rthercontrolf o r t h e macroeconomice n v i r o n m e n t byaddingthecombinedvariables,asi ne.g.,Lerner*RGDPG,H- statistic*RGDPG andetc.Finally,itshouldbefurthercontrolledtheforeignownershipbyin corporatingadummyvariablew h i c h setto

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Author Timeperiod Countries Econome- trictechni- q u e s

Moremarketpowerdoesnotl e a d tohigherinefficiencies;conce ntrationdegreeisnotnecessarily relatedtocompetitiondegree.

1994-2009 US 2SLQ regression Concentratio n ratio,HHI, H- statistic

Boone Z-score Competitionrobustlyincreasesb a nk soundness,viatheefficiencych annel

H-statistic ROA Concentration(HHI)do notalwaysseemto beappropriatecompetition;infa vorofmonopolistic competition.

AccordingtoannualreportsofWorldBank,thebankingsysteminASEANshowsahighlev elofcompetitionandalowdegreeofconcentration.Wecanobservethisfromageneralstatistical d a t a atregionallevel(Figure3 ) , b e i n g recomputedbasedo n datacollectedbytheWorldBa nkandGFD.

In the context of emerging and developing economies, the banking market of ASEAN exhibited the highest average concentration ratio of bank assets at 82.3% in 2014 This indicates a significant measure of market structure, complemented by the highest average value of the Lerner index at 0.38, reflecting substantial market power Consequently, the banking market in the region is highly concentrated, with large banks holding a considerable market share, highlighting the ongoing trends of acquisitions and mergers.

4 Cambodia KHM ANZRoyalBank(Cambodia)Limited

7 Cambodia KHM Maybank(Cambodia)Plc

16 Cambodia KHM CathayUnitedBank(Cambodia)CorporationLtd

17 Cambodia KHM Sacombank(Cambodia)Plc

18 Cambodia KHM HongLeongBank(Cambodia)Plc

29 Indonesia IDN BankMandiri(Persero)Tbk

30 Indonesia IDN BankRakyatIndonesia(Persero)Tbk

38 Indonesia IDN BankOfTokyo-MitsubishiUfj,Ltd.,The

113 LaoPDR LAO ANZBank(LAO)Limited

122 Malaysia MYS UnitedOverseasBank(Malaysia)Bhd.

124 Malaysia MYS OCBCBank(Malaysia)Berhad

130 Malaysia MYS BankofTokyo-MitsubishiUFJ(Malaysia)Berhad

131 Malaysia MYS DeutscheBank(Malaysia)Bhd.

133 Malaysia MYS BankofChina(Malaysia)Berhad

134 Malaysia MYS MizuhoBank(Malaysia)Berhad

137 Malaysia MYS IndustrialandCommercialBankofChina(Malaysia)Berhad

145 Malaysia MYS IndiaInternationalBank(Malaysia)Bhd

164 Philippines PHL CTBCBank(Philippines)Corp

165 Philippines PHL CARDBank,Inc,AMicrofinance-OrientedRuralBank

178 Thailand THA UnitedOverseasBank(Thai)PCL

183 Thailand THA StandardCharteredBank(Thai)PublicCompanyLimited

185 Thailand THA IndustrialandCommercialBankofChina(Thai)PublicCompanyLimited-

194 Vietnam VNM SaigonThuongTinCommercialJoint-StockBank-SACOMBANK-

197 Vietnam VNM AsiaCommercialJoint-stockBank-NganHangaChau

209 Vietnam VNM HSBCBank(Vietnam)Ltd

213 Vietnam VNM ANZBank(Vietnam)Limited

219 Vietnam VNM StandardCharteredBank(Vietnam)Ltd

220 Vietnam VNM PetrolimexGroupCommercialJointStockBank(The)-PGBank

Cambodia Indonesia LaoPDR Malaysia Philippines Thailand Vietnam

Year Cambodia Indonesia LaoPDR Malaysia Philippines Thailand Vietnam

LER_DEPO,LER_ENTRY,LER_RECAPwhichistreatedasanendogenousvariable.

Appendix 5B:The combinedeffectofH-statisticas a bankcompetitionandbankregulatoryfactor

Appendix 5C:Thecombinedeffectof HHI as abankcompetitionand bankregulatoryfactor

Appendix 6:Robust checkwith CR3variablethatisconsideredas abankconcentrationproxy

| Robust lerner| Coef Std Err t P>|t| [95% Conf Interval]

Variables:hstatistichstatistic2sizeloanllpcorevrgdpginfacrisis gcrisis chi2(10) = 35.60

Model1–Table 9a xtivreg2 lnzscore lerner2 size loan llp corev rgdpg inf acrisis gcrisis (lerner=stockfinfree right),fe first endog(lerner) cluster(id)

Warning-singleton groups detected.2 observation(s) not used

Number of groups= 183 Obs per group: min= 2 avg= 8.2 max= 20

First-stage regression of lerner:

Statistics robust to heteroskedasticity and clustering on idNumber of obs= 1506

-+ - stock| 0028615 0011242 2.55 0.011 0006561 0050668 finfree| -.0054544 0019215 -2.84 0.005 -.0092239 -.0016849 right| -.0077401 003263 -2.37 0.018 -.0141413 -.0013389 lerner2| -.025757 099839 -0.26 0.796 -.2216187 1701048 size| 0519826 0281743 1.85 0.065 -.003289 1072542 loan| 0865888 1680123 0.52 0.606 -.2430136 4161911 llp| 4.324743 1.036264 4.17 0.000 2.291825 6.357661 corev| -.0760197 0753949 -1.01 0.314 -.2239275 0718881

Sanderson-Windmeijer multivariateFtest of excluded instruments:F(3, 182)= 8.47

Summary results for first-stage regressions

NB: first-stage test statistics cluster-robust

Stock-Yogo weak IDFtest critical values for single endogenous regressor:

5% maximal IV relative bias 13.91 10% maximal IV relative bias 9.08 20% maximal IV relative bias 6.46 30% maximal IV relative bias 5.39 10% maximal IV size 22.30 15% maximal IV size 12.83

Source: Stock-Yogo (2005).Reproduced by permission.NB:

Critical values are for i.i.d errors only

Ho: matrix of reduced form coefficients has rank=K1-1

(underidentified)Ha: matrix has rank=K1 (identified)

Kleibergen-Paap rk LM statistic Chi-sq(3)%.02 P-val=0.0000

Ho: equation is weakly identified

Stock-Yogo weak ID test critical values for K1=1 and L1=3:

5% maximal IV relative bias 13.91 10% maximal IV relative bias 9.08 20% maximal IV relative bias 6.46 30% maximal IV relative bias 5.39 10% maximal IV size 22.30 15% maximal IV size 12.83

Anderson-Rubin Wald test F(3,182)= 7.87 P-val=0.0001 Anderson-Rubin Wald test Chi-sq(3)= 23.90 P-val=0.0000 Stock-Wright LMSstatistic Chi-sq(3)= 23.47 P-val=0.0000

Source: Stock-Yogo (2005).Reproduced by permission

NB: Critical values are for Cragg-DonaldFstatistic and i.i.d errors

Tests of joint significance of endogenous regressors B1 in main equationHo: B1=0 and orthogonality conditions are valid

NB: Underidentification, weak identification and weak-identification- robusttest statistics cluster-robust

Estimates efficient for homoskedasticity only

Statistics robust to heteroskedasticity and clustering on id

Number of clusters (id) = 183 Number of obs= 1506

F( 10, 182)= 9.01 Prob>F = 0.0000 Total (centered) SS = 321.7393485 Centered R2 = 0.1675 Total (uncentered) SS = 321.7393485 Uncentered R2= 0.1675

| Robust lnzscore| Coef Std Err z P>|z| [95% Conf Interval] -+ - lerner | 4338656 4369333 0.99 0.321 -.422508 1.290239 lerner2 | -.018162 0485126 -0.37 0.708 -.113245 076921 size | -.1812809 0345146 -5.25 0.000 -.2489283 -.1136335 loan | 8159377 1911056 4.27 0.000 4413776 1.190498 llp | -10.40748 3.409326 -3.05 0.002 -17.08964 -3.725323 corev | -.6311889 2418959 -2.61 0.009 -1.105296 -.1570816 rgdpg | 0290576 0085191 3.41 0.001 0123604 0457548 inf | 0073722 0065072 1.13 0.257 -.0053817 020126 acrisis | 2171779 2284558 0.95 0.342 -.2305871 6649429 gcrisis | -.0761537 0404952 -1.88 0.060 -.1555228 0032153 - Underidentification test (Kleibergen-Paap rk LM statistic): 25.018

Weak identification test (Cragg-Donald WaldFstatistic): 13.463

(Kleibergen-Paap rk WaldFstatistic): 8.468 Stock-Yogo weak ID test critical values:5% maximal IV relative bias 13.91

10% maximal IV relative bias 9.08 20% maximal IV relative bias 6.46 30% maximal IV relative bias 5.39 10% maximal IV size 22.30 15% maximal IV size 12.83

Source: Stock-Yogo (2005).Reproducedby permission

NB: Critical values are for Cragg-DonaldFstatistic and i.i.d errors

HansenJstatistic (overidentification test of all instruments): 13.445

Chi-sq(2) P-val= 0.0012 -endog- option:

Endogeneity test of endogenous regressors: 2.066

Chi-sq(1) P-val= 0.1506 Regressors tested: lerner

Included instruments: lerner2 size loan llp corev rgdpg inf acrisis gcrisisExcluded instruments: stock finfree right

= stockfinfreeright),fefirstendog(hstatistic)cluster(id)Warning- singletongroupsdetected 1observation(s)notused

Numberofgroups= 185 Obspergroup:min= 2 avg= 8.6 max= 20

Robust Std.Err t P>|t| [95%Conf.Interval] -+ - stock | -.0004686 0001687 -2.78 0.006 -.0007996 -.0001376 finfree | 0035305 0002979 11.85 0.000 0029461 0041149 right | -.0003699 0001945 -1.90 0.057 -.0007515 0000116 hstatistic2 | 1.101743 021394 51.50 0.000 1.059775 1.143711 size | -.0037153 0018414 -2.02 0.044 -.0073276 -.0001031 loan | 0462254 0173129 2.67 0.008 0122632 0801875 llp | 2428294 1361886 1.78 0.075 -.0243271 5099858 corev | -.0013511 0004172 -3.24 0.001 -.0021695 -.0005327 rgdpg | -.0026535 0009941 -2.67 0.008 -.0046036 -.0007034 inf | -.0005105 0003684 -1.39 0.166 -.0012332 0002122 acrisis | -.0284933 0099932 -2.85 0.004 -.0480967 -.00889 gcrisis | -.0213344 0041413 -5.15 0.000 -.0294582 -.0132105 - Ftestofexcludedinstruments:F(

Kleibergen-PaaprkLMstatistic Chi-sq(3)p.28 P-val=0.0000

Anderson-RubinWaldtest F(3,184)= 13.20 P-val=0.0000 Anderson-RubinWaldtest Chi-sq(3)= 40.10 P-val=0.0000 Stock-WrightLMSstatistic Chi-sq(3)= 38.63 P-val=0.0000

NB:Underidentification,weakidentificationandweak-identification- robustteststatisticscluster-robust

Tiêu đề	Competition and Bank Stability in ASEAN Countries: An Empirical Analysis
Tác giả	Ms. Vu Thi Quynh
Người hướng dẫn	Dr. Nguyen Thi Thuy Linh
Trường học	University of Economics Ho Chi Minh City
Chuyên ngành	Development Economics
Thể loại	Thesis
Năm xuất bản	2017
Thành phố	Ho Chi Minh City

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