Dr. Xiaoqing (Maggie) Fu (University of Macau): Bank Competition and Financial Stability in Asia Pacific
Bank Competition and Financial Stability in Asia Pacific
Xiaoqing (Maggie) Fu, Yongjia (Rebecca) Lin and Philip Molyneux
Bank competition is at the center of the academic and policy debate regarding financial stability. The recent financial crisis further demonstrates the urgent need to address the trade-offs between bank competition and financial soundness. Using data on 14 Asia Pacific economies from 2003 to 2009, this study investigates the influence of bank competition, concentration, regulation and national institutions on individual bank fragility as measured by the probability of bankruptcy and the bank’s Z-score. The results suggest that greater concentration fosters financial fragility and that lower pricing power also induces bank risk exposure when macroeconomic, bank-specific, regulatory and institutional factors are controlled for. In addition, there is no evidence that shows that larger banks in this region could better diversity their portfolios. Finally, the results indicate that better institutional development and stringent capital requirements improve financial stability, whereas property rights and deposit insurance are associated with greater bank fragility.
JEL classification: G21, G28
Keywords: Bank competition; Financial stability; Banking regulation, Banks in Asia Pacific
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