Does efficiency play a transmission role in the relationship between competition and stability in the banking industry? New evidence from South Asian economies

Abstract

This study explores the transmission role of efficiency in the relationship between bank competition and stability consisting 88 commercial banks in four South Asian economies (Bangladesh, India, Pakistan and Sri Lanka) over the time period of 2012–2018. Both efficiency adjusted Lerner index and Boone indicator are used to measure the bank competition. The results using two‐step system generalized method of moment propose that efficiency adjusted Lerner index and Boone indicator has significant negative influence on the stability of banks. The main findings are strongly in the favor of the postulate that efficiency plays a transmission role in the relationship between bank competition and stability. The results provide significant policy implications for policy makers regarding commercial bank's stability.