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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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    Cited by:

    1. Rakshit, Bijoy & Bardhan, Samaresh, 2022. "An empirical investigation of the effects of competition, efficiency and risk-taking on profitability: An application in Indian banking," Journal of Economics and Business, Elsevier, vol. 118(C).
    2. Biswa Swarup Misra & Paolo Coccorese, 2022. "Market power, efficiency and stability of Indian banks," Economic Change and Restructuring, Springer, vol. 55(4), pages 2263-2292, November.
    3. Bijoy Rakshit & Samaresh Bardhan, 2022. "Does Bank Efficiency Enhance Bank Performance? Empirical Evidence From Indian Banking," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(Special I), pages 103-124, March.
    4. Bijoy Rakshit, 2022. "Does Bank Competition Necessarily Contribute to Higher Profits? The Case of Indian Banking," Asian Economics Letters, Asia-Pacific Applied Economics Association, vol. 3(3), pages 1-7.
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    6. Le Dinh Hac & Dinh Tran Ngoc Huy & Nguyen Ngoc Thach & Bui Minh Chuyen & Pham Thi Hong Nhung & Tran Duc Thang & Tran Tuan Anh, 2021. "Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(3), pages 291-307, March.
    7. Zoran Grubišić & Sandra Kamenković & Tijana Kaličanin, 2021. "Comparative Analysis of the Banking Sector Competitiveness in Serbia and Montenegro," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 75-91.
    8. Khan, Mohammad Azeem & Ahmad, Wasim, 2022. "Fresh evidence on the relationship between market power and default risk of Indian banks," Finance Research Letters, Elsevier, vol. 46(PA).

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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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