Issue

Vol 36 No 3 (2021): September

Date Log

Submitted
Mar 10, 2021
Accepted
Sep 23, 2021
Published
Sep 29, 2021
Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Copyright

Upon acceptance of an article, authors transfer copyright to the JIEB as part of a journal publishing agreement, but authors still have the right to share their article for personal use, internal institutional use, and for any use permitted under the CC BY-SA license

Open Access

Articles are freely available to the public without any subscription with permitted reuse. For open access articles, permitted third party (re)use is defined by the following Creative Commons user licenses: Creative Commons Attribution (CC BY-SA).

Does Institutional Quality Matter in the Relationship Between Competition and Bank Stability? Evidence from Asia

https://doi.org/10.22146/jieb.v36i3.1428
Muizzuddin Muizzuddin
muizzudin@unsri.ac.id
Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada/ Department of Management, Faculty of Economics, Universitas Sriwijaya
Eduardus Tandelilin
Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada
Mamduh Mahmadah Hanafi
Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada
Bowo Setiyono
Department of Management, Faculty of Economics and Business, Universitas Gadjah Mada

Corresponding Author(s) : Muizzuddin Muizzuddin

muizzudin@unsri.ac.id

Journal of Indonesian Economy and Business, Vol 36 No 3 (2021): September

Abstract

Introduction/Main Objectives: This study aims to investigate whether competition impacts bank stability. Furthermore, the study also analyzes the role of institutional quality in a country, such as voice and accountability, political stability, government effectiveness, regulatory quality, the rule of law, and control of corruption, forming the effect of competition on bank stability. Background Problem: Analysis of the relationship between competition and bank stability has been at the center of academic and policy debate. However, the theoretical and empirical research has not concluded whether bank competition leads to more or fewer stable banks. Novelty: We consider institutional quality's role in mitigating the negative impact of competition on bank stability, which has mainly been under-elaborated in prior studies, particularly in using measures from The World Bank’s Worldwide Governance Indicators, which measure how the institutions of each country influence bankers’ and the people's behavior, as part of the cultural system. Research Methods: Using a sample of 427 Asian commercial banks from 2011 to 2019, we employ the generalized method of moments (GMM) estimator and consider loan growth and the cost to income ratio as instrumental variables. Findings/Results: We find robust evidence that competition erodes bank stability. Besides, better institutional quality, especially government effectiveness, regulatory quality, the rule of law, and corruption control in each country are important aspects that promote bank stability and mitigate the negative impact of competition on bank stability. Conclusion: Competition has a negative impact on bank stability. Meanwhile, the quality of institutions can both promote bank stability and mitigate this negative relationship.

Keywords

competition bank stability institutional quality
Muizzuddin, M., Tandelilin, E., Hanafi, M. M., & Setiyono, B. (2021). Does Institutional Quality Matter in the Relationship Between Competition and Bank Stability? Evidence from Asia. Journal of Indonesian Economy and Business, 36(3), 283-301. https://doi.org/10.22146/jieb.v36i3.1428
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX
References
  1. Agoraki, M.-E. K., Delis, M. D., & Pasiouras, F. (2011). Regulations, competition and bank risk-taking in transition countries. Journal of Financial Stability, 7(1), 38-48. doi:10.1016/j.jfs.2009.08.002
  2. Albaity, M., Mallek, R. S., & Noman, A. H. M. (2019). Competition and bank stability in the MENA region: The moderating effect of Islamic versus conventional banks. Emerging Markets Review, 38, 310-325. doi:https://doi.org/10.1016/j.ememar.2019.01.003
  3. Allen, F., & Gale, D. (2004). Competition and financial stability. Journal of Money, Credit and Banking, 36(3), 453-480. Retrieved from http://www.jstor.org/stable/3838946
  4. Anginer, D., Demirguc-Kunt, A., & Zhu, M. (2014). How does competition affect bank systemic risk? Journal of Financial Intermediation, 23(1), 1-26. doi:https://doi.org/10.1016/j.jfi.2013.11.001
  5. Barry, T. A., Lepetit, L., & Tarazi, A. (2011). Ownership structure and risk in publicly held and privately owned banks. Journal of Banking & Finance, 35(5), 1327-1340. doi:10.1016/j.jbankfin.2010.10.004
  6. Barth, J. R., Caprio, G., & Levine, R. (2004). Bank regulation and supervision: what works best? Journal of Financial Interme¬diation, 13(2), 205-248. doi:10.1016/j.jfi.2003.06.002
  7. Barth, J. R., & Wihlborg, C. (2016). Too Big to Fail and Too Big to Save: Dilemmas for Banking Reform. National Institute Econo¬mic Review, 235(1), R27-R39. doi:10.1177/002795011623500113
  8. Beck, T., De Jonghe, O., & Schepens, G. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218-244. doi:10.1016/j.jfi.2012.07.001
  9. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581-1603. doi:https://doi.org/10.1016/j.jbankfin.2005.05.010
  10. Beck, T., Demirguc-Kunt, A., & Maksimovic, V. (2005). Financial and legal constraints to growth: Does firm size matter? The Journal of Finance, 60(1), 137-177. doi:https://doi.org/10.1111/j.1540-6261.2005.00727.x
  11. Ben Ali, M. S., Fhima, F., & Nouira, R. (2020). How does corruption undermine banking stability? A threshold nonlinear framework. Journal of Behavioral and Experimental Finance, 27, 100365. doi:https://doi.org/10.1016/j.jbef.2020.100365
  12. Berger, A. N., Klapper, L. F., & Turk-Ariss, R. (2009). Bank Competition and Financial Stability. Journal of Financial Services Research, 35(2), 99-118. doi:10.1007/s10693-008-0050-7
  13. Bolt, W., & Tieman, A. F. (2004). Banking Competition, Risk and Regulation. The Scandinavian Journal of Economics, 106(4), 783–804. doi:10.1111/j.1467-9442.2004.00389.x
  14. Boyd, J. H., & De Nicoló, G. (2005). The theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329-1343. Retrieved from: http://www.jstor.org/stable/3694928
  15. Bui, D. T., & Bui, T. M. H. (2019). How does institutional development shape bank risk-taking incentives in the context of financial openness? Pacific-Basin Finance Journal, 58. doi:10.1016/j.pacfin.2019.101209
  16. Chinn, M. D., & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81(1), 163-192. doi:https://doi.org/10.1016/j.jdeveco.2005.05.010
  17. Claessens, S. (2009). Competition in the Financial Sector: Overview of Competition Policies. The World Bank Research Observer, 24(1), 83-118. doi:10.1093/wbro/lkp004
  18. Danisman, G. O., & Demirel, P. (2019). Bank risk-taking in developed countries: The influence of market power and bank regula¬tions. Journal of International Financial Markets, Institutions and Money, 59, 202-217. doi:10.1016/j.intfin.2018.12.007
  19. Delis, M. D. (2012). Bank competition, financial reform, and institutions: The importance of being developed. Journal of Development Economics, 97(2), 450-465. doi:10.1016/j.jdeveco.2011.05.012
  20. Demirgüç-Kunt, A., & Detragiache, E. (1998). The Determinants of Banking Crises in Developing and Developed Countries. Staff Papers (International Monetary Fund), 45(1), 81-109. doi:10.2307/3867330
  21. Diallo, B. (2015). Bank competition and crises revisited: New results. Economics Letters, 129, 81-86. doi:10.1016/j.econlet.2015.02.015
  22. Etudaiye-Muhtar, O. F., & Abdul-Baki, Z. (2020). Market structure, institutional quality and bank capital ratios: evidence from developing countries. European Journal of Management and Business Economics, 30(1), 92-107. doi:10.1108/ejmbe-09-2019-0158
  23. Fazio, D. M., Silva, T. C., Tabak, B. M., & Cajueiro, D. O. (2018). Inflation targeting and financial stability: Does the quality of institutions matter? Economic Modelling, 71, 1-15. doi:https://doi.org/10.1016/j.econmod.2017.09.011
  24. Fu, X., Lin, Y., & Molyneux, P. (2014). Bank competition and financial stability in Asia Pacific. Journal of Banking & Finance, 38, 64-77. doi:10.1016/j.jbankfin.2013.09.012
  25. Furlong, F. T., & Keeley, M. C. (1989). Capital regulation and bank risk-taking: A note. Journal of Banking & Finance, 13(6), 883-891. doi:https://doi.org/10.1016/0378-4266(89)90008-3
  26. Gazdar, K., & Cherif, M. (2015). Institutions and the finance–growth nexus: Empirical evidence from MENA countries. Borsa Istanbul Review, 15(3), 137-160. doi:https://doi.org/10.1016/j.bir.2015.06.001
  27. Goetz, M. R. (2018). Competition and bank stability. Journal of Financial Interme-diation, 35, 57-69. doi:10.1016/j.jfi.2017.06.001
  28. Gugler, K., Mueller, D. C., Peev, E., & Segalla, E. (2013). Institutional determinants of domestic and foreign subsidiaries’ performance. International Review of Law and Economics, 34, 88-96. doi:https://doi.org/10.1016/j.irle.2013.01.003
  29. Hall, A. R. (2005). Generalized Method of Moments. Oxford: Oxford University Press.
  30. Hellmann, T. F., Murdock, K. C., & Stiglitz, J. E. (2000). Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough? American Economic Review, 90(1), 147-165. doi:10.1257/aer.90.1.147
  31. Hirata, W., & Ojima, M. (2020). Competition and bank systemic risk: New evidence from Japan's regional banking. Pacific-Basin Finance Journal, 60. doi:10.1016/j.pacfin.2020.101283
  32. Hoque, H., Andriosopoulos, D., Andriosopoulos, K., & Douady, R. (2015). Bank regulation, risk and return: Evidence from the credit and sovereign debt crises. Journal of Banking & Finance, 50, 455-474. doi:https://doi.org/10.1016/j.jbankfin.2014.06.003
  33. Horváth, R., & Vaško, D. (2016). Central bank transparency and financial stability. Journal of Financial Stability, 22, 45-56. doi:https://doi.org/10.1016/j.jfs.2015.12.003
  34. Houston, J. F., Lin, C., & Ma, Y. (2011). Media ownership, concentration and corruption in bank lending. Journal of Financial Econo¬mics, 100(2), 326-350. doi:https://doi.org/10.1016/j.jfineco.2010.12.003
  35. Jiménez, G., Lopez, J. A., & Saurina, J. (2013). How does competition affect bank risk-taking? Journal of Financial Stability, 9(2), 185-195. doi:10.1016/j.jfs.2013.02.004
  36. Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5), 1183-1200.
  37. Klomp, J., & de Haan, J. (2014). Bank Regulation, the Quality of Institutions, and Banking Risk in Emerging and Developing Countries: An Empirical Analysis. Emerging Markets Finance and Trade, 50(6), 19-40. doi:10.1080/1540496X.2014.1013874
  38. Klomp, J., & Haan, J. d. (2012). Banking risk and regulation: Does one size fit all? Journal of Banking & Finance, 36(12), 3197-3212. doi:10.1016/j.jbankfin.2011.10.006
  39. La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113-1155. doi:10.1086/250042
  40. Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275. doi:10.1016/j.jfineco.2008.09.003
  41. Law, S. H. (2018). Applied Panel Data Analysisis; Short Panels. Serdang: Univer¬sitas Putra Malaysia Press.
  42. Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452-1467. doi:10.1016/j.jbankfin.2007.12.002
  43. Lepetit, L., & Strobel, F. (2013). Bank insolvency risk and time-varying Z-score measures. Journal of International Financial Markets, Institutions and Money, 25, 73-87. doi:https://doi.org/10.1016/j.intfin.2013.01.004
  44. Levine, R. (1998). The Legal Environment, Banks, and Long-Run Economic Growth. Journal of Money, Credit and Banking, 30(3), 596-613. doi:10.2307/2601259
  45. Marcus, A. J. (1984). Deregulation and bank financial policy. Journal of Banking & Finance, 8(4), 557-565.
  46. Martinez-Miera, D., & Repullo, R. (2010). Does Competition Reduce the Risk of Bank Failure? Review of Financial Studies, 23(10), 3638-3664. doi:10.1093/rfs/hhq057
  47. Maudos, J. n., & Fernández de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking & Finance, 28(9), 2259-2281. doi:https://doi.org/10.1016/j.jbankfin.2003.09.004
  48. McKinsey&Company. (2019). Asia-Pacific Banking Review 2019 Bracing for consoli¬dation: The quest for scale. McKinsey & Company.
  49. Nier, E., & Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Interme-diation, 15(3), 332-361. doi:https://doi.org/10.1016/j.jfi.2006.03.001
  50. Noman, A. H. M., Gee, C. S., & Isa, C. R. (2017). Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PLoS One, 12(5), 1-27. doi:10.1371/journal.pone.0176546
  51. Noman, A. H. M., Gee, C. S., & Isa, C. R. (2018). Does bank regulation matter on the relationship between competition and financial stability? Evidence from Southeast Asian countries. Pacific-Basin Finance Journal, 48, 144-161. doi:10.1016/j.pacfin.2018.02.001
  52. Onali, E. (2014). Moral Hazard, Dividends, and Risk in Banks. Journal of Business Finance & Accounting, 41(1-2), 128-155. doi:https://doi.org/10.1111/jbfa.12057
  53. Risfandy, T., Tarazi, A., & Trinugroho, I. (2020). Competition in dual markets: Implications for banking system stability. Global Finance Journal. doi:10.1016/j.gfj.2020.100579
  54. Rokhim, R., & Min, I. (2020). Funding Liquidity and Risk Taking Behavior in Southeast Asian Banks. Emerging Markets Finance and Trade, 56(2), 305-313. doi:10.1080/1540496X.2018.1483230
  55. Santoso, W., Yusgiantoro, I., Soedarmono, W., & Prasetyantoko, A. (2021). The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom. Research in International Business and Finance, 56. doi:10.1016/j.ribaf.2020.101358
  56. Soedarmono, W., Machrouh, F., & Tarazi, A. (2013). Bank competition, crisis and risk taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions and Money, 23, 196-221. doi:10.1016/j.intfin.2012.09.009
  57. Stock, J. H., Wright, J. H., & Yogo, M. (2002). A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments. Journal of Business & Economic Statistics, 20(4), 518-529. Retrieved from http://www.jstor.org/stable/1392421
  58. Suarez, J. (1994). Closure rules, market power and risk-taking in a dynamic model of bank behavior. London School of Economics. LSE Financial Markets Group Discussion Paper No 196. London.
  59. Tongurai, J., & Vithessonthi, C. (2020). Bank regulations, bank competition and bank risk-taking: Evidence from Japan. Journal of Multinational Financial Management, 56. doi:10.1016/j.mulfin.2020.100638
  60. Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks. Borsa Istanbul Review, 18(4), 349-358. doi:10.1016/j.bir.2018.07.006
  61. Turk Ariss, R. (2010). On the implications of market power in banking: Evidence from developing countries. Journal of Banking & Finance, 34(4), 765-775. doi:10.1016/j.jbankfin.2009.09.004
  62. Uddin, A., Chowdhury, M. A. F., Sajib, S. D., & Masih, M. (2020). Revisiting the impact of institutional quality on post-GFC bank risk-taking: Evidence from emerging countries. Emerging Markets Review, 42. doi:10.1016/j.ememar.2019.100659
  63. Vives, X. (2010). Competition and stability in banking. (WP-852). IESE Business School – University of Navarra, Madrid, Spain.
  64. Vives, X. (2016). Competition and stability in banking: The role of regulation and competition policy. Princeton, NJ: Princeton University Press.
  65. Voghouei, H., Azali, M., & Law, S. H. (2011). Does the Political Institution Matter for Financial Development? Economic Papers: A journal of applied economics and policy, 30(1), 77-98. doi:https://doi.org/10.1111/j.1759-3441.2011.00095.x
  66. Weill, L. (2011). Do Islamic Banks Have Greater Market Power? Comparative Eco-no¬mic Studies, 53(2), 291-306. doi:10.1057/ces.2011.1
  67. Yusgiantoro, I., Soedarmono, W., & Tarazi, A. (2019). Bank consolidation and financial stability in Indonesia. International Economics, 159, 94-104. doi:10.1016/j.inteco.2019.06.002
Read More
Author biographies is not available.
Download this PDF file
PDF
Statistic
Read Counter : 1861 Download : 1545