An analysis of bank competition and financial stability: evidence from the South African banking sector.

Abstract

There is a crucial role that the banking in terms of play and serve as central to the economy. Thus, competition is vital to the banking industry. However, while competition is perceived to be vital to the banking industry, it is claimed to have both positive and negative implications on the financial stability of banks. This study investigated the link between bank competition and financial stability in South Africa. The study utilized panel regression to examine the associations between different measures of bank competition and financial stability for the major five banks over the sample period spinning from 2009 to 2019. This study employed three different models namely, the Boone indicator, Lerner index, and fluctuating H-statistics to test for bank competition theories. The study further investigated the level of competition in the South African banking sector by unpacking the concept of concentration in the South African banking sector, using Concentration Ratios (CR) and Herfindahl-Hirschman Index (HHI). The study used the Z-score and profitability as dependent variables to proxy for financial stability in the banking sector. The economic activity and the bank size were used as the control variables in the competition and stability models to account for any uncounted variables. The findings indicated that less competition in the banking market causes banks to engage in risky activities, face regulatory intervention, or, worse, fail, consistent with the competition stability hypothesis. Furthermore, more competition and access to related financial services can be applauded to produce a competing environment in the South African banking services industry. Overall, this study concluded by supporting that more competition enhances financial stability.