Does institutional quality reduce the impact of market concentration on bank stability? Evidence of developing countries

Figures & data

Table 1. The descriptive statistics of variables

Variable	Obs	Mean	Std. Dev.	Min	Max
ZSCORE	1,120	27.21	3.296	20.970	33.433
MC3	1,120	46.045	16.735	23.452	100.000
VAE	1,120	−0.275	0.510	−1.538	0.185
PVE	1,120	−0.650	0.587	−1.778	0.404
GEE	1,120	0.115	0.421	−0.332	1.267
RQE	1,120	−0.075	0.349	−0.669	0.838
RLE	1,120	−0.289	0.365	−0.719	0.623
CCE	1,120	−0.446	0.296	−0.839	0.411
SIZE	1,120	28.947	3.091	22.129	34.655
ROA	1,120	1.374	0.945	−2.357	3.847
LATA	1,120	0.127	0.075	0.004	0.336
FREE	1,120	49.358	11.177	30.000	70.000
GDP	1,120	5.289	1.574	−1.500	7.500
INF	1,120	5.350	4.993	−6.000	22.700

Notes: ZSCORE, the mean returns on assets and the mean standard deviation of ROA over the sample period, combined with the current period value of EQUITY; The three-market concentration (MC3). The structural indicator of the degree of concentration of banks within an economy, measured by the concentration of assets held by the three major banks in each economy. A higher value indicates a higher level of market concentration: Institutional quality proxies from WGI report on six dimensions of governance, voice and accountability(VAE), political stability(PVE), government effectiveness (GEE), regulatory quality (RQE), rules of law (RLE), and control of corruption (CCE). FREE, the financial freedom index, SIZE the natural logarithm of total assets. ROA, returns on assets; LATA, the ratio of liquid assets to total assets; GDP, the growth rate of gross domestic products; INF, the inflation. All variables have been weinsorized at the 1% and 99% levels (except for market concentration, Institutional quality and financial freedom and macroeconomic variables). (Robust standard errors are in parentheses. *,** and *** the Significant at 10, 5 and 1% levels, respectively)

Table 2. The correlation matrix of variables

	ZSCORE	MC3	VAE	PVE	GEE	RQE	RLE	CCE	SIZE	ROA	LATA	FREE	GDP	INF
ZSCORE	1
MC3	0.503	1
VAE	0.085	−0.243	1
PVE	0.274	0.217	−0.469	1
GEE	0.417	0.667	−0.136	.416	1
RQE	0.479	0.563	0.095	.179	0.909	1
RLE	0.291	0.586	−0.270	.554	0.943	0.861	1
CCE	0.216	0.452	−0.092	.566	0.902	0.835	0.903	1
SIZE	0.878	−0.568	−0.125	.256	−0.561	−0.634	−0.422	−0.349	1
ROA	0.126	0.000	0.137	−.202	−0.051	0.007	−0.102	−0.110	0.054	1
LATA	−0.046	−0.067	0.431	−.191	−0.224	−0.215	−0.321	−0.249	−0.016	0.067	1
FREE	−0.133	−0.166	0.399	−.237	0.265	0.509	0.254	0.306	−0.260	0.075	−0.113	1
GDP	0.141	−0.146	0.031	.108	−0.228	−0.286	−0.217	−0.143	0.183	0.006	0.262	−0.276	1
INF	0.153	−0.096	−0.072	−.093	−0.459	−0.526	−0.491	−0.450	0.306	−0.009	0.119	−0.585	.293	1

Table 3. Variance inflation Factor (VIF) results

Variable	VIF ZSCORE
MC3	1.97	2.31	3.01	2.88	2.85	2.39
VAE	1.82
PVE		1.73
GEE			2.92
RQE				3.77
RLE					2.59
CCE						1.84
SIZE	1.96	2.48	1.91	2.02	1.9	1.91
ROA	1.04	1.11	1.04	1.03	1.06	1.06
LATA	1.46	1.15	1.16	1.16	1.24	1.16
FREE	2.33	1.99	2.06	2.73	2.02	2.09
GDP	1.21	1.26	1.21	1.21	1.22	1.24
INF	1.71	1.86	1.84	1.73	1.96	1.8
Mean VIF	1.69	1.74	1.9	2.06	1.86	1.68

Table 4. Regression estimates

ZSCOREt-1	ZSCORE (1)	ZSCORE (2)	ZSCORE (3)	ZSCORE (4)	ZSCORE (5)	ZSCORE (6)	ZSCORE (7)	ZSCORE (8)	ZSCORE (9)	ZSCORE (10)	ZSCORE (11)	ZSCORE (12)
ZSCOREt-1	0.779*** (0.003)	0.777*** (0.004)	0.769*** (0.044)	0.727*** (0.045)	0.741*** (0.038)	0.752*** (0.021)	0.712*** (0.044)	0.694*** (0.051)	0.754*** (0.005)	0.705*** (0.043)	0.697*** (0.020)	0.729*** (0.005)
MC3	0.005*** (0.001)	0.004*** (0.001)	0.016** (0.006)	0.008* (0.005)	0.007** (0.003)	0.007* (0.004)	0.002*** (0.001)	0.007** (0.004)	0.005*** (0.002)	0.008** (0.005)	0.005* (0.003)	0.008** (0.002)
SQMC3	−0.002*** (0.001)	−0.003** (0.001)	−0.001** (0.000)	−0.000** (0.000)	−0.001*** (0.000)	−0.001*** (0.000)	−0.005** (0.002)	−0.012*** (0.002)	−0.001*** (0.000)	−0.002*** (0.000)	−0.001* (0.000)	−0.001** (0.000)
VAE	0.043** (0.019)
PVE			0.045*** (0.051)
GEE					0.446*** (0.012)
RQE							0.504*** (0.024)
RLE									0.376*** (0.010)
CCE											0.129* (0.071)
MC3*VAE		0.001** (0.001)
MC3*PVE				0.005*** (0.000)
MC3*GEE						0.002** (0.001)
MC3*RQE								0.001*** (0.001)
MC3*RLE										0.001*** (0.002)
MC3*CCE												0.002** (0.001)
SIZE	0.232*** (0.004)	0.229*** (0.004)	0.261*** (0.036)	0.291*** (0.042)	0.266*** (0.041)	0.216*** (0.028)	0.501*** (0.017)	0.315*** (0.050)	0.522*** (0.012)	0.340*** (0.045)	0.5310*** (0.021)	0.279*** (0.008)
ROA	0.053*** (0.011)	0.034** (0.013)	0.162*** (0.008)	0.062*** (0.006)	0.099** (0.043)	0.047 (0.033)	0.038*** (0.008)	−0.054 (0.040)	0.139*** (0.008)	0.094*** (0.008)	0.072*** (0.019)	0.124*** (0.019)
LATA	0.808*** (0.109)	1.114*** (0.126)	0.369 (0.375)	−0.159 (0.501)	0.917* (0.493)	1.590*** (0.360)	2.004*** (0.170)	0.851 (0.607)	1.579*** (0.149)	1.938*** (0.114)	1.130*** (0.272)	−0.202 (0.240)
FREE	0.001 (0.000)	0.000 (0.001)	0.004*** (0.000)	−0.005 (0.003)	0.001 (0.002)	0002 (0.001)	0.007*** (0.000)	−0.003 (0.004)	0.004*** (0.000)	0004*** (0.000)	0.003*** (0.001)	−0.001 (0.001)
GDP	0.002 (0.002)	0.008*** (0.003)	0.003 (0.005)	0.010 (0.007)	−0.001 (0.002)	−0.006 (0.004)	0.008*** (0.001)	0.001 (0.007)	0.006*** (0.001)	0.005*** (0.001)	−0.001 (0.004)	0.010*** (0.003)
INF	−0.004*** (0.001)	−0.005*** (0.001)	−0.011*** (0.003)	−0.010*** (0.003)	−0.003 (0.002)	−0.003 (0.002)	−0.018*** (0.001)	−0.009*** (0.003)	−0.011*** (0.001)	−0.012*** (0.000)	−0.005*** (0.001)	−0.006*** (0.001)
Constant	−0.866 (0.138)	−0.738 (0.142)	−1.169 (0.569)	−1.271 (0.111)	−1.022 (0.448)	−1.110 (0.423)	−1.679 (0.210)	−0.638 (0.510)	−2.081 (0.184)	−2.002 (0.199	−1.128 (0.287)	−0.857 (0.209)
No. of Obs	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027
No. of Groups	80	80	80	80	80	80	80	80	80	80	80	80
AR(1) p-value	0.009	0.009	0.013	0.007	0.007	0.013	0.008	0.012	0.007	0.007	0.008	0.008
AR(2) p-value	0.432	0.415	0.505	0.385	0.422	0.369	0.347	0.454	0.346	0.326	0.415	0.534
Hansen test p-value	0.592	0.645	0.126	0.386	0.433	0.134	0.500	0.339	0.393	0.511	0.160	0.186

Notes: ZSCORE, the mean returns on assets and the mean standard deviation of ROA over the sample period, combined with the current period value of EQUITY; The three-market concentration (MC3). The structural indicator of the degree of concentration of banks within an economy, measured by the concentration of assets held by the three major banks in each economy. A higher value indicates a higher level of market concentration: Institutional quality proxies from WGI report on six dimensions of governance, voice and accountability (VAE), political stability(PVE), government effectiveness (GEE), regulatory quality (RQE), rules of law (RLE), and control of corruption (CCE). FREE, the financial freedom index, SIZE the natural logarithm of total assets. ROA, returns on assets; LATA, the ratio of liquid assets to total assets; GDP, the growth rate of gross domestic products; INF, the inflation. All variables have been weinsorized at the 1% and 99% levels (except for market concentration, Institutional quality and financial freedom and macroeconomic variables). (Robust standard errors are in parentheses. *,** and *** the Significant at 10, 5 and 1% levels, respectively)

Table 5. Robustness test using the bank risk

RISKt-1	RISK (1)	RISK (2)	RISK (3)	RISK (4)	RISK (5)	RISK (6)	RISK (7)	RISK (8)	RISK (9)	RISK (10)	RISK (11)	RISK (12)
RISKt-1	0.236*** (0.017)	0.231*** (0.016)	0.248*** (0.006)	0.254*** (0.006)	0.292*** (0.003)	0.287*** (0.003)	0.249*** (0.007)	0.238*** (0.003)	0.233*** (0.003)	0.231*** (0.003)	0.240*** (0.004)	0.235*** (0.024)
MC3	−0.035*** (0.019)	−0.029*** (0.001)	−0.027*** (0.009)	−0022** (0.008)	−0.012*** (0.001)	−0.032*** (0.001)	−0.046*** (0.011)	−0.057*** (0.005)	−0.062*** (0.004)	−0.076*** (0.004)	−0.017*** (0.003)	−0.068*** (0.032)
SQMC3	0.001*** (0.000)	0.003** (0.000)	0.001*** (0.001)	0.001*** (0.000)	0.010*** (0.001)	0.020*** (0.006)	0.001*** (0.000)	0.001*** (0.000)	0.001*** (0.000)	0.002*** (0.000)	0.003*** (0.000)	0.001*** (0.000)
VAE	−0.829*** (0.216)
PVE			−0.221*** (0.034)
GEE					−0.966*** (0.017)
RQE							−0.261*** (0.013)
RLE									−0.668*** (0.038)
CCE											−1.651*** (0.033)
MC3*VAE		−0.047*** (0.008)
MC3*PVE				−0.015*** (0.000)
MC3*GEE						−0.019*** (0.000)
MC3*RQE								0.008 (0.001)
MC3*RLE										−0.010*** (0.001)
MC3*CCE												0.010 (0.014)
SIZE	−0.144*** (0.002)	−0.036*** (0.002)	0.124 (0.010)	−0.038*** (0.002)	−0.161*** (0.004)	−0.161*** (0.005)	−0.017*** (0.001)	−0.015 (0.002)	−0.052*** (0.006)	−0.046*** (0.007)	−0.053*** (0.009)	0.038 (0.057)
ROA	−0.199*** (0.006)	−0.396** (0.009)	−0.266*** (0.008)	−0.249*** (0.008)	−0.133*** (0.012)	−0.191*** (0.010)	−0.102*** (0.005)	−0.124*** (0.006)	−0.324*** (0.008)	−0.392*** (0.010)	0.031 (0.031)	0.303 (0.250)
LATA	−0.088 (0.083)	−4.091*** (0.155)	−0.149*** (0.049)	−0.010*** (0.043)	−2.252*** (0.148)	3.320 (0.207)	−0.377*** (0.107)	−1.667*** (0.292)	−1.767*** (0.068)	−1.606*** (0.068)	−3.212*** (0.301)	−9.972*** (0.306)
FREE	−0.019*** (0.000)	−0.026*** (0.000)	−0.023*** (0.000)	−0.022*** (0.000)	−0.021*** (0.000)	−0.022*** (0.001)	−0.005*** (0.000)	−0.036*** (0.001)	−0.027*** (0.000)	−0.032*** (0.000)	−0.028*** (0.001)	−0.030*** (0.001)
GDP	−0.060*** (0.001)	−0.086*** (0.001)	−0.0073*** (0.001)	−0.069*** (0.001)	−0.118*** (0.001)	−0.114*** (0.001)	−0.069*** (0.002)	−0.032*** (0.001)	−0.032*** (0.001)	−0.066*** (0.001)	−0.056*** (0.003)	−0.061*** (0.003)
INF	0.127*** (0.001	0.139*** (0.002)	0.184*** (0.001)	0.185*** (0.001)	0.194*** (0.002)	0.193*** (0.003)	0.036*** (0.001)	0.069*** (0.003)	0.069*** (0.002)	0.184*** (0.002)	0.203*** (0.004)	0.200*** (0.004)
Constant	−3.739 (1.336)	−5.783 (1.280)	−0.478 (0.603)	2.812 (0.054)	6.102 (0.133)	6.466 (0.194)	0.436 (0.060)	1.340 (0.370)	8.333 (0.161)	9.127 (0.166)	4.981 (0.304)	5.941 (0.229)
No.of Obs	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027	1027
No.of Groups	80	80	80	80	80	80	80	80	80	80	80	80
AR(1) p-value	0.004	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.004	0.000
AR(2) p-value	0.134	0.148	0.112	0.108	0.488	0.391	0.143	0.109	0.213	0.670	0.574	0.481
Hansen test p-value	0.721	0.798	0.487	0.491	0.491	0.505	0.106	0.106	0.725	0.730	0.131	0.130

Notes: RISK, the yearly volatility of weekly stock returns; The three-market concentration (MC3). The structural indicator of the degree of concentration of banks within an economy, measured by the concentration of assets held by the three major banks in each economy. A higher value indicates a higher level of market concentration: Institutional quality proxies from WGI report on six dimensions of governance, voice and accountability (VAE), political stability (PVE), government effectiveness (GEE), regulatory quality (RQE), rules of law (RLE), and control of corruption (CCE). FREE, the financial freedom index, SIZE the natural logarithm of total assets. ROA, returns on assets; LATA, the ratio of liquid assets to total assets; GDP, the growth rate of gross domestic products; INF, the inflation. All variables have been weinsorized at the 1% and 99% levels (except for market concentration, Institutional quality and financial freedom and macroeconomic variables). (Robust standard errors are in parentheses. *,** and *** the Significant at 10, 5 and 1% levels, respectively).

Table 6. Robustness test using the alternative of market concentration (MC5)

ZSCOREt-1	ZSCORE (1)	ZSCORE (2)	ZSCORE (3)	ZSCORE (4)	ZSCORE (5)	ZSCORE (6)	ZSCORE (7)	ZSCORE (8)	ZSCORE (9)	ZSCORE (10)	ZSCORE (11)	ZSCORE (12)
ZSCOREt-1	0.696*** (0.012)	0.687*** (0.009)	0.686*** (0.044)	0.688*** (0.046)	0.736*** (0.028)	0.705*** (0.024)	0.746*** (0.002)	0.742*** (0.001)	0.714*** (0.005)	0.709*** (0.017)	0.700*** (0.013)	0.775*** (0.020)
MC5	0.007* (0.004)	0.003*** (0.001)	0.032** (0.012)	0.033*** (0.012)	0.018** (0.006)	0.011** (0.005)	0.003** (0.001)	0.007*** (0.001)	0.008* (0.004)	0.012** (0.005)	0.006*** (0.001)	0.033*** (0.011)
SQMC5	−0.005*** (0.001)	−0.003** (0.000)	−0.002*** (0.001)	−0.002*** (0.001)	−0.001** (0.000)	−0.001** (0.000)	−0.008** (0.001)	−0.010** (0.000)	−0.003*** (0.003)	−0.002*** (0.012)	−0.002*** (0.0010)	−0.005*** (0.003)
VAE	0.127** (0.058)
PVE			−0.001 (0.069)
GEE					0.166** (0.070)
RQE							0.149*** (0.040)
RLE									0.233*** (0.062)
CCE											0.165*** (0.019)
MC5*VAE		0.000** (0.000)
MC5*PVE				0.002** (0.001)
MC5*GEE						0.002* (0.001)
MC5*RQE								0.002*** (0.001)
MC5*RLE										0.002*** (0.001)
MC5*CCE												0.003* (0.002)
SIZE	0.276*** (0.048)	0.292*** (0.022)	0.370** (0.049)	0.368*** (0.053)	0.304*** (0.029)	0.306*** (0.026)	0.254*** (0.022)	0.259*** (0.021)	0.303*** (0.017)	0.287*** (0.014)	0.309*** (0.004)	0.266*** (0.077)
ROA	−0.087 (0.045)	−0.067 (0.009)	−0.092 (0.116)	−0.064 (0.062)	0.056*** (0.005)	−0.064 (0.063)	−0.034 (0.015)	0.041** (0.016)	0.070** (0.027)	0.038* (0.022)	0.056*** (0.004)	−0.031 (0.059)
LATA	−0.629 (0.380)	0.535*** (0.131)	1.792** (0.848)	1.842*** (0.612)	1.258*** (0.119)	2.414*** (0.768)	0.209 (0.160)	0.155 (0.163)	1.478*** (0.263)	1.582*** (0.286)	0.695*** (0.601)	2.223*** (0.804)
FREE	−0.001 (0.002)	−0.000 (0.001)	0.004 (0.005)	0.005 (0.003)	0.000 (0.000)	0.007** (0.003)	0.002*** (0.001)	0.001*** (0.000)	0.001 (0.001)	0.005*** (0.001)	0.002*** (0.000)	0.004 (0.003)
GDP	0.022*** (0.007)	0.024*** (0.003)	0.005 (0.010)	0.004 (0.008)	0.011*** (0.001)	0.001 (0.005)	0.012*** (0.003)	0.013*** (0.003)	−0.002 (0.003)	0.002 (0.003)	0.005*** (0.002)	−0.001 (0.007)
INF	−0.012*** (0.003)	−0.008*** (0.001)	−0.002 (0.005)	−0.004 (0.004)	−0.017*** (0.001)	−0.005 (0.005)	−0.004*** (0.002)	−0.005*** (0.001)	−0.001 (0.002)	−0.002 (0.002)	−0.009*** (0.001)	−0.007*** (0.006)
Constant	0.542 (0.476)	0.269 (0.190)	−1.901 (1.611)	−1.895 (1.025)	−1.628 (0.104)	−3.540 (1.202)	−0.293 (0.158)	−0.446 (0.155)	−1.444 (0.363)	−1.118 (0.407)	−0.874*** (0.076)	−2.875 (1.048)
No.of Obs	994	994	994	994	994	994	994	994	994	994	994	994
No.of Groups	80	80	80	80	80	80	80	80	80	80	80	80
AR(1) p-value	0.007	0.007	0.013	0.008	0.006	0.010	0.008	0.008	0.008	0.008	0.008	0.009
AR(2)p-value	0.613	0.608	0.452	0.366	0.445	0.337	0.495	0.505	0.359	0.361	0.453	0.347
Hansen test p-value	0.170	0.209	0.147	0.595	0.660	0.771	0.258	0.356	0.225	0.520	0.938	0.525

Notes: ZSCORE, the mean returns on assets and the mean standard deviation of ROA over the sample period, combined with the current period value of EQUITY; The five-market concentration (MC5). The structural indicator of the degree of concentration of banks within an economy, measured by the concentration of assets held by the three major banks in each economy. A higher value indicates a higher level of market concentration: Institutional quality proxies from WGI report on six dimensions of governance, voice and accountability (VAE), political stability (PVE), government effectiveness (GEE), regulatory quality (RQE), rules of law (RLE), and control of corruption (CCE). FREE, the financial freedom index, SIZE the natural logarithm of total assets. ROA, returns on assets; LATA, the ratio of liquid assets to total assets; GDP, the growth rate of gross domestic products; INF, the inflation. All variables have been weinsorized at the 1% and 99% levels (except for market concentration, Institutional quality and financial freedom and macroeconomic variables). (Robust standard errors are in parentheses. *,** and *** the Significant at 10, 5 and 1% levels, respectively)