Market power and risk: Evidence from ASEAN commercial banking system

Abstract

The purpose of this chapter is to assess the causal relationship between the market power and risks of ASEAN commercial banks. Using the data of 118 ASEAN commercial banks between 2002 and 2017, we measure the market power using the Lerner index and risk using measures, including the Z-score and the Loan Loss Provision ratio. We establish a panel vector auto-regression to estimate this relationship. Our results indicate that there is a causal relationship between the market power and risks of ASEAN banks, supporting both the competition-stability and the competition-fragility theories. The results of this study are the basis for policy suggestions for investors and executive managers to improve banking performance through risk reduction.