Does banking market power matter on financial stability?

Abstract

This study investigates the impact of market power on bank financial stability using bank-level data from 24 banks in Vietnam over the 2008-2017 period. In order to measure the degree of market power in the Vietnam banking sector, we compute the separated Lerner index by fixed effect model, random effect model, and Z-score as a measure of financial stability. We use the static and dynamic panel data regression methods to esti-mate the relationship between market power and financial stability. Our results support the “competition - sta-bility” view and show that Vietnamese commercial banks facing little competition tended to be less stable. We also find that size had a positive effect on stability while loan growth rate had a negative effect on financial stability. The study suggests some important policy implications for improving bank stability in Vietnam.

Keywords

• Financial stability
• Fragility/stability
• Market power
• Vietnam