Bank Competition and Financial Stability in Asia Pacific

The impact of bank competition on financial stability has been a focus of academic and policy debate over the last two decades and particularly since the 2007–08 global financial crises (Beck, 2008; OECD, 2011). Under the traditional competition-fragility view, banks cannot earn monopoly rents in competitive markets, and this results in lower profits, capital ratios, and charter values. This makes banks less able to withstand demand- or supply-side shocks and encourages excessive risk-taking (Marcus, 1984). Alternatively, the competition-stability view suggests that competition leads to greater stability. A less competitive banking market may lead to more risk-taking if the big banks are deemed too important to fail and as such obtain implicit (or explicit) subsidies via government safety nets (Mishkin, 1999). In addition, banks with more market power tend to charge higher loan rates, which may induce borrowers to assume greater risk leading to greater default. In competitive banking markets loan rates are lower, Too-Big-To-Fail issues and safety net subsidies are smaller, and this results in a positive link between bank competition and stability (Boyd and De Nicoló, 2005). It could also be the case, as noted by Martinez-Miera and Repullo (2010) that bank competition and stability are linked in a non-linear manner, and in a similar vein Berger et al. (2009) argue that competition and concentration may coexist and can simultaneously induce stability or fragility.