Bank consolidation and financial stability revisited: Evidence from Indonesia

Inka Yusgiantoro (1) , Wahyoe Soedarmono (2) , Amine Tarazi (3)

1 Otoritas Jasa Keuangan (Indonesia Financial Services Authority)
2 Faculty of Business
3 LAPE - Laboratoire d'Analyse et de Prospective Economique

This paper extends prior literature on the link between consolidation and stability in banking using a single country setting. From a sample of Indonesian commercial banks over the 2010-2015 time span, we construct the Lerner index as a measure of bank market power due to consolidation. Our empirical results document that higher bank market power tends to reduce insolvency risk and increase capital ratios. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. We therefore highlight that although consolidation among state-owned banks reduces cost inefficiency as in Hadad et al. (2013), further efforts to reduce state-owned banks' market power are necessary after consolidation. This paper also suggests that strengthening market power in large private-owned banks, but encouraging competition in small private-owned banks to reduce market power, are of particular importance for financial stability.

Mots clés: Consolidation; ownership type; size; financial stability; Indonesian banking

Domaines: Economies et finances

Inka Yusgiantoro, Wahyoe Soedarmono, Amine Tarazi. Bank consolidation and financial stability revisited: Evidence from Indonesia. 2017. ⟨hal-01577970v1⟩