Market Power and Multidimensional Efficiency in Banking: Diversification, Stability, and Digital–Governance Dynamics

This study examines how banks navigate the dual strategic imperatives of securing market power and optimizing multidimensional operational efficiency—technical, scale, and allocative efficiency—within emerging and transitional banking systems. Focusing on business model diversification and financial stability, this study also accounts for the conditioning roles of governance quality, institutional complexity, credit risk, and digitalization. Using bank-level data from Association of Southeast Asian Nations (ASEAN) and Middle East and North Africa (MENA) countries, the analysis applies Partial Least Squares Structural Equation Modeling (PLS-SEM) and multi-group analysis to assess direct, mediating, and moderating relationships. The results indicate that diversification and financial stability significantly strengthen market power, while their effects on efficiency are largely negative across efficiency dimensions. Governance quality partially mediates the stability–market power relationship, whereas institutional complexity weakens this linkage. Digital transformation maturity and market digitalization condition the diversification–efficiency nexus, with effects varying across efficiency types and regions. Overall, the findings reveal a strategic trade-off between competitive positioning and operational efficiency, emphasizing the importance of governance structures and digital capabilities in shaping bank performance across heterogeneous institutional contexts.