Affiliations 

  • 1 Department of Finance and Banking, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia
  • 2 Department of Accountancy, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia
PLoS One, 2017;12(5):e0176546.
PMID: 28486548 DOI: 10.1371/journal.pone.0176546

Abstract

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

* Title and MeSH Headings from MEDLINE®/PubMed®, a database of the U.S. National Library of Medicine.