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Nonlinearity of Competition-Stability Nexus: Evidence from Bangladesh

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  • Dutta, Kumar Debasis
  • Saha, Mallika

Abstract

Financial deregulation since the 1980s has been stimulating fierce competition among banks and influencing financial stability across the world. In pace with this, Bangladesh’s banking industry is also experiencing intense competition since it is composed of many banks. Te empirical evidence on competition and stability widely debate to date, perhaps for not considering the potential nonlinearity. Therefore, our study aims to explore the nonlinear impact of competition on the financial stability of Bangladeshi banks over 2010-2017. For achieving this objective, we compute the Boone indicator and Z-score using bank-level data to measure competition and stability, respectively, and examine the nonlinear dynamics of competition-stability nexus employing threshold analysis in a panel setup. Our findings confirm that the competition-stability relationship is nonlinear and implies that financial stability is more substantial (weaker) in a less (more) competitive market. Our results bear specific policy implications.

Suggested Citation

  • Dutta, Kumar Debasis & Saha, Mallika, 2020. "Nonlinearity of Competition-Stability Nexus: Evidence from Bangladesh," MPRA Paper 111531, University Library of Munich, Germany, revised 04 Sep 2020.
    • Handle: RePEc:pra:mprapa:111531
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    References listed on IDEAS

    as
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    2. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
    3. Peter J. Morgan & Victor Pontines, 2014. "Financial Stability and Financial Inclusion," Microeconomics Working Papers 24278, East Asian Bureau of Economic Research.
    4. Milne,Alistair, 2009. "The Fall of the House of Credit," Cambridge Books, Cambridge University Press, number 9780521762144, October.
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    More about this item

    Keywords

    Boone’s indicator; competition; fnancial stability; panel threshold analysis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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