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Bank consolidation and financial stability revisited: Evidence from Indonesia

Abstract : 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. JEL Code: G21, G28
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Soumis le : lundi 17 juin 2019 - 09:30:28
Dernière modification le : mardi 22 février 2022 - 09:00:02


  • HAL Id : hal-02157533, version 1



Inka Yusgiantoro, Wahyoe Soedarmono, Amine Tarazi. Bank consolidation and financial stability revisited: Evidence from Indonesia. International Economics, 2019, 159 (94-104). ⟨hal-02157533⟩



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