Does banking market power matter on financial stability?

Abstract

This study investigates the impact of market power on bank financial stability using bank-level data from 24 banks in Vietnam over the 2008- 2017 period. In order to measure the degree of market power in the Vietnam banking sector, we compute the separated Lerner index by fixed effect model, random effect model, and Zscore as a measure of financial stability. We use the static and dynamic panel data regression methods to estimate the relationship between market power and financial stability. Our results support the “competition - stability” view and show that Vietnamese commercial banks facing little competition tended to be less stable. We also find that size had a positive effect on stability while loan growth rate had a negative effect on financial stability. The study suggests some important policy implications for improving bank stability in Vietnam.