Banking system concentration and unemployment in developing countries

Abstract

This paper studies the effect of banking system concentration on unemployment in developing countries. Using data on 42 developing countries, it finds that more concentration increased unemployment over the period 1987 to 2007. The magnitude of the effect is substantial. The result is robust to both endogeneity of the bank concentration variable and numerous variations in specification. It is important because many developing countries are characterized by high levels of both banking system concentration and unemployment.

Banking Concentration and Financial Stability: New Evidence from a Developing Country

“…This is attributed to policies that are introduced to protect big banks from failing. Our estimation result therefore supports the 'concentration-fragility' hypothesis and is consistent with existing empirical studies that include Berger et al (2009), Soedarmono et al (2013) and Feldman (2015 check whether the fit indices are accepted or rejected a goodness of fit test was conducted. The goodness of fit results of bank concentration, competition, regulation and financial stability are reported in Figure 7.…”

“…On the contrary, "concentration-fragility" hypothesis argues that too much concentration may lead to higher lending rates and risk of default, difficulty in monitoring banks and moral hazard problem due to the notion of "too big to fail" policies (Berger et al, 2009;Soedarmono et al 2013;Feldman, 2015). Large banks encourage investment in more risky ventures, which have an impact on stability of the financial system.…”

The Role of Banking Concentration on Financial Stability

“…A higher concentration will further induce banks to undertake risky ventures leading to a moral hazard problem. Our estimation result, therefore, supports the 'concentration-fragility' hypothesis, which is consistent with Feldman (2015).…”

“…On the contrary, "concentration-fragility" hypothesis contends that too much concentration may lead to higher lending rates that would exacerbate default risks (IJtsma, Spierdijk, & Shaffer, 2017;Mirzaei, Moore, & Liu, 2013;Uhde & Heimeshoff, 2009). In concentrated markets, as bank institutions get bigger and more diversified, the risks of their portfolios may increase, (Boyd, De Nicolo, & Jalal, 2006), internal inefficiencies and increased operational risk may as well increase (Laeven & Levine, 2007) with implications on monitoring due to moral hazard and the notion of "too big to fail" policies (Feldman, 2015). Despite banks holding high capital in a concentrated market, the number of assets they own is not large enough to mitigate the effect of non-payment risks linked to higher risk-taking business organizations (Soedarmono, Machrouh, & Tarazi, 2013).…”

“…This makes them difficult to monitor and hence they exploit customers by charging high interest, which induces customers to invest in risky ventures (Boyd & De Nicolo, 2005). Bank concentration also encourages moral hazard behavior centered on the notion of 'too big to fail' policies (Feldman, 2015).…”