Banking Market Size Structure and Financial Stability: Evidence from Eight Asian Countries

Abstract

Using commercial bank data from eight major Asian countries, we examine the relationship between the banking market size structure and the stability of financial institutions. We also analyze the effect of bank upsizing on the financial stability. Our results show that a rise in large banks’ market power, accompanying an increase in their market shares, lowers the capital adequacy of small banks. Small banks’ nonperforming loans and the possibility of their bankruptcy also increase as large banks’ market shares rise. We further show that larger banks tend to have lower capital adequacy ratios, liquidity ratios, and distance-to-default ratios. Our study suggests that large banks’ greater market shares are associated with small banks’ financial instability. Overall, these findings are consistent with the notion of the recent banking literature that has important antitrust policy implications.

KEY WORDS:

• Asian countries
• banking market
• financial stability
• large bank
• size structure

Acknowledgments

We would like to thank Joonsuk Bae, Sangho Kim, and Young-Hwi Yoo of the Financial System Research Team at BOK, Soo Jin Lee of the Korea Institute of Finance, and Jungsoo Park of Sogang University for their constructive comments and suggestions.

Notes

1. Figure 1 shows the annual changes of total asset size for the three largest banks from the eight Asian countries that we explore in this article. Among those nations, China records the highest change in its top three banks, with total assets for 2012 showing nineteen times larger than total assets for 1994. Malaysia records a 14.9 times increase, while Thailand shows an 11.6 times increase in total assets over the same period. Overall, Figure 1 shows that bank size has grown substantially during the 1994–2012 period in the eight Asian countries.

2. In their model, Park and Pennacchi (2009) argue that a greater presence of large multimarket banks (LMBs) tends to promote competition in retail loan markets but also tends to harm competition in retail deposit markets. Thus, they find that a greater presence of LMBs in a local market tends to lower small business loan rates but also tends to lower retail deposit rates.

3. Large banks mostly provide loans to borrowers with the highest creditworthiness, resulting in their monopoly of prime loans.

4. Our sample comprises 6,924 firm-year observations, of which 1,325 firm-years are from China, 503 from Malaysia, 654 from Taiwan, 1,059 from Indonesia, 343 from Korea, 334 from Thailand, 2,207 from Japan, and 499 from the Philippines.

5. We calculate the HHI based on the total deposits of the individual banks in a local market, following the definition by Park and Pennacchi (2009). They also use the HHI and large banks’ market shares to control for the market size structure.

6. The small bank dummy is used in the panel regression, univariate mean analysis, and Wilcoxon rank sum test.

7. Although we do not tabulate the results, we also estimate a regression with country fixed effects and find the same results.

8. In robustness tests, we further control Interbank Rate, Asian Financial Crisis Dummy, Global Financial Crisis Dummy, and BaselⅡ Dummy.

9. Chan, Covrig, and Ng (2005) use the GDP per capita as a proxy for measuring economic development. Lamont, Polk, and Saa-Requejo (2001) and Keim and Stambaugh (1986) use the interbank lending rate as a proxy for measuring the monetary policy.

10. China has the highest concentration, followed by Korea, Thailand, Indonesia, Malaysia, the Philippines, Japan, and Taiwan.

11. The increasing large bank market share comprises 3,972 firm-year observations and the decreasing large bank market share comprises 2,952 firm-year observations.

12. Our empirical design assumes lending without loan sales. For modeling and empirical tests on loan sales and securitization along with differing corporate tax rates, see Han, Park, and Pennacchi (2015).

13. Distance-to-default expresses the inverse relationship of the possibility of bankruptcy.

14. Wang (2014) argues that the Basel Accord can affect market competition. Thus, in our untabulated results, we verify our results by conducting separate regressions for each country and control the impact of BaselⅡ and find that the results are qualitatively identical to those of our earlier tests.

Additional information

Funding

This research is financially supported by the Bank of Korea (BOK) although the views expressed in this article are solely from the authors.