The Effect of Product Market Competition on Stability and Capital Ratio of Banks in Southeast Asian Countries

Abstract

This study analytically examines the effect of product market competition on the stability and bank capital ratio of Southeast Asian commercial banks. This paper use the sys-GMM dynamic panel data estimation technique in the study, based on data extracted from 63 unbalanced panels of commercial banks in ASEAN for the period 2009 to 2017, totaling 567 observations. The empirical findings reveal that the Lerner index has a positive and significant effect on stability at Malaysian and Singaporean banks. A negatively significant nexus between market competition and stability is reported for Indonesian and Thai banks. The competition–stability nexus shows no significant relationship at Filipino commercial banks. Further results show that product market competition has a positively significant influence on the capital ratio at banks in Malaysia, Singapore, Indonesia, and Thailand. By contrast, the nexus between product market competition and the capital ratio is negatively significant at banks in the Philippines. This empirical study has significant supervisory and regulatory implications in the ASEAN banking industry, especially in emerging and developing countries. The study provides support for the competition–stability view and suggests that banks in more competitive markets maintain a higher capital ratio in order to be able to absorb unexpected losses. The study gives credibility to the concept of a nexus between product market competition, stability, and the capital ratio using recent financial data from an emerging and developing economy perspective.