Bank competition and the linkage to stability and growth: international evidence and implication to Thailand

Abstract

Over the past two decades, the impact of bank competition to financial stability as well as to economic growth has been the center of interest for both academicians and practitioners. The recent financial crises throughout the globe further exhibit the urgent need to conclude the relationship between (1) bank competition and financial stability and (2) bank competition and economic growth. This dissertation, therefore, attempts to fill in the literature gap of both competition-stability and competition-growth nexuses by using a sample of 81 countries including both developed and developing countries during the year 2000 to 2013.

For the relationship between bank competition and financial system stability, the empirical results from fixed effect panel regression technique reveal that proxies for bank competition, specifically market concentration (structural competition approach) and market pricing power (non-structural competition approach), have opposite effects on financial system stability. Also, these two measures together with three-bank specific variables, namely bank efficiency, revenue diversification and portfolio risk, can explain the variation of financial system stability in the sampling countries and periods. The results are robust to an array of alternative methodologies and variable specifications.

For the relationship between bank competition and economic growth, the empirical results from fixed effect panel regression technique confirm that proxies for bank competition, specifically market concentration (structural competition approach) and market pricing power (non-structural competition approach), have opposite effects on economic growth. Also, the impact of competition on economic growth is stronger in countries with lower level of accessibility to bank funding, lower credit to private sector and more efficient banking system.

After obtaining the above conclusions at global level, this dissertation further explores the policy implication to Thailand under competition-stability nexus. A sample of 15 commercial banks during the year 2000 to 2013 is used. The empirical results from fixed effect panel regression show that (1) there exists no relationship between market concentration (structural competition approach) and financial system stability, (2) there exists a negative relationship between market pricing power (non-structural competition approach) and financial system stability and (3) there exists a positive relationship between bank efficiency and financial system stability. Therefore, the policy that encourages the competition and efficiency in Thai banking industry is recommended.