Competition, bank fragility, and financial crisis

  • Received October 29, 2017;
    Accepted January 10, 2018;
    Published January 22, 2018
  • Author(s)
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  • Article Info
    Volume 13 2018, Issue #1, pp. 22-36
  • Cited by
    7 articles

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This paper examines how competition affects bank fragility and how this relation varies in normal times and during a financial crisis using the data from Indonesian commercial banking industry. The author finds significant evidence, both statistically and economically, that more competition reduces bank fragility. In particular, the author finds that a decrease in Herfindahl-Hirschman Index (HHI) of deposits by 100 points leads to an increase in bank Z-score by 14.22 percent from its mean. Similarly, a decrease in HHI of loans by 100 points leads to an increase in Z36 by 20.44 percent. This finding is consistent across different kinds of robustness tests, including endogeneity, as well as alternative bank fragility and competition measures. However, this competition-stability nexus holds only in normal times and is reversed during a financial crisis. This suggests that the impact of competition on bank fragility is conditional on the economic condition.

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    • Table 1. Variable definition
    • Table 2. Summary statistics
    • Table 3. Competition and bank fragility
    • Table 4. Endogeneity – IV regression
    • Table 5. Competition and bank fragility in normal times and financial crisis