Market structure, institutional quality and bank stability: evidence from emerging and developing countries

Abstract

PurposeThe purpose of this study is to carry out an empirical investigation about how the level of market concentration or competitiveness of the banking system and institutional quality are associated with bank’s financial stability.Design/methodology/approachThis study uses dynamic panel data techniques on the sample of 133 developing and emerging countries over the years 2002–2020.FindingsThe authors document several significant findings. First, there is evidence that bank stability is positively associated with the level of market concentration. The result is in line with the concentration–stability view that banks operating in a more concentrated market tend to be more stable than those in a less concentrated market. Second, the results confirm that the quality of the institutional environment plays a critical role in improving the stability of banks in developing and emerging countries. Third, the authors find that institutional development can moderate the effect of market concentration (or competitiveness of the banking system) on bank stability. Specifically, the results show that better institutional quality enhances the positive influence of bank concentration on the bank’s financial stability in developing and emerging countries. These results are robust to different specifications with the alternative measures of bank stability and market concentration.Originality/valueThis study provides further understanding regarding the effects of the level of market concentration or competitiveness of the banking system and institutional quality on bank stability in 133 developing and emerging countries over the years 2002–2020.