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Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking

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  • Bijoy Rakshit

    (Department of Humanities and Social Sciences, Indian Institute of Technology, Ropar, Punjab, India)

  • Samaresh Bardhan

    (Department of Humanities and Social Sciences, Indian Institute of Technology, Ropar, Punjab, India)

Abstract

The primary purpose of this paper is to empirically investigate the impact of bank competition on financial stability in India. We use a dynamic panel model to examine whether an increase in bank competition hindrances financial stability of commercial banks in India over the period 1996 to 2016. Findings reveal that in India, a higher degree of bank competition is positively associated with the prevalence of non-performing loans. Additionally, the positive impact of the Lerner index on Z-score lends support to competition-fragility hypothesis. However, we argue that both the views of competition-stability and competition-fragility can coexist in a single banking system like India.

Suggested Citation

  • Bijoy Rakshit & Samaresh Bardhan, 2020. "Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 75-102.
    • Handle: RePEc:cbk:journl:v:9:y:2020:i:si:p:75-102
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    More about this item

    Keywords

    Bank competition; Competition-Stability; Competition-Fragility; Financial Stability.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F30 - International Economics - - International Finance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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