Competition, stability, and institutional environment: The case of dual banking economies

Abstract

We measure the impact of competition and institutional quality on stability for dual banking economies. Our sample comprises 492 banks (109 Islamic and 383 conventional banks) from 17 countries with dual‐banking systems. The sample period is from 2005 to 2020. The estimations are performed using Two Step System Generalized Method of Moments approach. Our findings reveal heterogeneous effect of competition on stability. We found the evidence of competition‐stability paradigm in case of full sample as well as for Islamic banks. There is no effect of competition on the stability of conventional banks. Furthermore, there is no evidence of size effect in the competition‐stability results. The impact of legal institution is insignificant. We also observe that better quality of political and the economic institutions increases the bank stability. We attribute these findings to the conjecture that better political and/or legal institutions improve bank stability by reducing information asymmetry and adverse selection. Finally, we find the evidence that political, legal and economic dimensions of institutions have differential effect on competition‐stability relationship. The findings are robust to alternative definitions of competition, stability and different methodological approaches.

Country-level institutional quality and financial system efficiency: An international evidence

“…Furthermore, a strong institutional framework can also increase the efficiency of the financial system by reducing systemic risk and promoting the safety and stability of the financial sector. Financial stability results in greater efficiency as resources are saved from being used to manage systemic risks [ 22 ], Azmi, Anwer [ 54 ]. Overall, findings of current study significantly contribute to the existing literature by highlighting the importance of strong institutional framework in enhancing financial system efficiency.…”

“…Financial stability results in greater efficiency as resources are saved from being used to manage systemic risks. Azmi, Anwer [ 54 ] found that better quality of economic and political institutions leads to greater bank stability, by reducing information asymmetry and adverse selection. Most of the indicators of institutional quality are found to play an important role in enhancing banking sector efficiency [ 22 ].…”