Helping or hampering banks competition? The Asian experience after the Asian financial crisis

Abstract

In this paper we revisit the question of the determinants of competition in banking markets and provide a new, in-depth analysis. We use the successful stabilization experience that followed the Asian Financial Crisis and evaluate the effects of a comprehensive set of potential competition determinants on a sample of nine Asian countries observed in the period 2000–2016. Focusing on the loans market we estimate two separate models of competition: a more flexible reformulation of Bolt and Humphrey’s competition efficiency, and a dynamic Lerner index model. Our results are consistent between the two models. Competition overall increases moderately, despite the more prudential policies adopted after the crisis. Lower entry barriers, higher foreign penetration, foreign ownership and competition from the stock market, as well as higher concentration and larger size, all encourage competition among banks. Higher freedom on non-traditional banking markets instead promotes substitution and reduces competition for loans, as banks shift their competitive efforts towards potentially more profitable non-interest activities. These findings lend some support to the current restructuring policies in the region, and to the concomitant liberalization processes that have continued to take place.