Bank competition and financial stability: the case of vietnamese commercial banks

Abstract

The main purpose of this research is to investigate the influence of bank competition on financial stability in Vietnamese commercial banks over the period 2006 – 2016. The Lerner indicator is employed to measure competition while banks’ probability of failure (Z-score), non-performing loan (hereafter, NPL) ratio and capital adequacy ratio (CAR) are proxies for financial stability. The estimation results from System Generalized

Method of Moments (SGMM) and robustness checks (ordinary least squares (OLS), Fixed- effect (FE) and Random effect (RE) regression) indicate that bank competition is positively

related to Z-score and CAR, supported by the “competition - stability” initial view. Conversely, Lerner index impacts positively the probability of loan non-payment which documents that expanding lending products enhances the capability of riskier loan portfolio, supported by the “competition – risk” prevalent view. Otherwise, we further find strong evidence that the relationship between bank competition and financial stability is non-linear with U-shape.