COMPETITION AND BANK STABILITY: A GLOBAL PERSPECTIVE

Abstract

Several rounds of banking reforms were introduced globally as a result of GFC 2007-2008. The effects of these reforms have affected the banking industry. One of these reforms was bank consolidations, leading banking sector towards high concentration. As a result, the level of competition changed. This study presents a global perspective on “the influence of competition on banks stability” by reviewing the recent literature describing “competition-stability nexus”. The relevant researches were extracted by using Prisma Protocol. Data extraction was done by using “master taxonomy”. Two main theories “competition-fragility” and “competition-stability” have been examined by several authors using “GMM estimator” as a statistical tool. The problem identified from literature is that there is lack of consensus on the “competition-stability nexus”, hence studies produced mixed results. This study aims to identify and discuss the causes of heterogeneity in results. The study shows that researchers have tested these theories under different settings i.e., by sampling the data of specific region for different period of time, hence the results are mixed. In addition, the level of competition and bank concentration vary from one region’s banking sector to another. Moreover, the measurement of competition also varies among researchers, being another possible cause of mixed results. The study suggests that taking sample of single country instead of multiple countries may produce more specific results; and Boone indicator should also be used to measure competition to obtain robust results.

Keywords: Competition; Bank Stability; Bank Concentration; Boone Index.