Competition, Financial Intermediation, and Riskiness of Banks: Evidence from the Asia-Pacific Region

ABSTRACT

From a sample of commercial banks in the Asia-Pacific region over the 1994–2009 period, this study highlights that banks in less competitive markets exhibit lower loan growth and higher instability. Such instability is further followed by a decline in deposit growth, suggesting that Asian banks are also subject to indirect market discipline mechanisms through bank competition. This study therefore sheds light on the importance of enhancing bank competition to overcome bank risk and strengthen financial intermediation. Likewise, this study advocates the importance of strengthening market discipline to reduce bank riskiness regardless of the degree of competition in the banking industry.

KEY WORDS:

• bank competition
• loan growth
• risk
• market discipline
• Asia Pacific

Notes

1. The number of banks in each country is shown in parentheses. In the meantime, our sample could suffer from a survival bank bias because some banks that have failed are not necessarily present throughout our entire sample period, particularly after they default. Nevertheless, because we use panel data techniques and because we have not eliminated the observations on banks that have failed prior to their default this should be less of a concern.