Competition and Financial Stability: A new Paradigm

  • Zakaria FIRANO University Mohammed V Rabat, Morocco
  • Fatine FILALI University Mohammed V Rabat, Morocco

Abstract

From the Nineties, the Moroccan banking system knew several reforms which contributed to the liberalization and the deregulation of banks. The objective is to arrive to a banking sector resilient, competitive, developed and making it possible to increase the surplus of the borrowers and the depositors. Although the relation between competition and financial stability is discussed, this paper proposes to formulate a new explanation of this relation while being based on the trilogy: competition, concentration and stability (CCS). Initially we develop the model of Panzar and Rose (1982, 1987) to measure the competition of the dynamic banking system since 1993. Then, a data model of panel was estimated, highlighting the nonlinear relation between financial stability and banking competition. The checking of this relation made it possible to propose a new design concerning the relation between financial stability and competition. Indeed, the results obtained with through an optimization model affirm that this relation is cyclic, in the direction where, a stronger competition supports financial stability in situation of strong impact strength, on the other hand, in a situation of financial instability, more competition worsens the situation of the banking system.

References

[1] Acharya, V., Gale, D., Yorulmazer, T. 2009. Rollover risk and market freezes, EFA 2009 Bergen Meetings Paper, 60 p.
[2] Belaisch, A. 2003. Do Brazilian banks compete? IMF Working Paper No. 03/113, Washington: International Monetary Fund.
[3] Berger, A.N., Demsetz, R.S., Strahan, P.E. 1999. The consolidation of the financial services industry: Causes, consequences, and implications for the future. Journal of Banking and Finance, 23: 135 - 194.
[4] Berger, A.N., Deyoung, R., Genay, H., Udell, G. F. 2000. The globalization of financial institutions: Evidence from Crosse-border banking performance. Brookings-Wharton Papers on Financial Services, 3: 23 - 158.
[5] Berger, A.N., Hannan, T.H. 1989. The price-concentration relationship in banking. Review of Economics and Statistics, 71: 291 - 299.
[6] Bikker, J.A., Groeneveld, J.M. 2000. Competition and concentration in the EU banking industry. Kredit und Kapital, 33: 62 - 98.
[7] Bresnahan, T.F. 1982. The oligopoly solution concept is identified. Economic Letters, 10: 87 - 92.
[8] Carletti, E. 2008. Competition and regulation in banking, in A. Thakor et A. Boot (éd.), Handbook of Financial Intermediation and Banking: 449 - 482.
[9] Carletti, E., Hartmann, P., Spagnolo, G. 2002. Implications of the bank merger wave for competition and stability, in Risk measurement and systemic risk, Third Joint Central Bank Research Conference Conseil des gouverneurs de la Réserve fédérale des États-Unis, de la Banque du Japon et de la Banque Centrale Européenne, 38-50 pp.
[10] Carletti, E., Vives, X. 2008. Regulation and competition policy in the banking sector in Vives, X (éd.), Assessment and Perspectives of Competition Policy in Europe, Oxford University Press. Available at: https://pdfs.semanticscholar.org/1b3b/ea755804076cabac3d3adacf3484f046a593.pdf
[11] Claessens, S., Laeven, L. 2004. What drives bank competition? Some international evidence. Journal of Money, Credit, and Banking, 36: 563 - 583.
[12] Coccorese, P. 1998. Assessing the competitive conditions in the Italian banking system: Some empirical evidence. BNL Quarterly Revue, 205: 171 - 191.
[13] De Bandt, O., Davis, E.P. 2000. Competition, contestability and market structure in European banking sectors on the Eve of EMU. Journal of Banking and Finance, 24: 1045 - 1066.
[14] Filali A.F., Firano Z., Afifa H. 2015. Evaluation of banking competition in Morocco: Implementation of Panzar and Rosse model, International Journal of Economic Policy in Emerging Economies, Volume 8, 3: 245-261.
[15] Firano, Z., Abouch, M., Saidi, A. 2012. Financial stability: Definitions, theoretical foundations and roles of the Central Banks. International Research Journal of Finance and Economics, 84: 76-94.
[16] Firano, Z., Benbachir, S., Abouch, M. 2012. Macroeconomic framework for financial stability for Morocco, MPRA Paper 43998, University Library of Munich, Germany.
[17] Fungacova, Z., Weill, L. 2009. How market power influences bank failures: Evidence from Russia. Economics of Transition, 21(2): 301–322, April 2013 as Does Competition Influence Bank Failures? Evidence from Russia; BOFIT Discussion Paper No. 12/2009. DOI: http://dx.doi.org/10.2139/ssrn.1471189
[18] Hannan, T.H., Berger, A.N. 1991. The rigidity of prices: Evidence from the banking industry. American Economic Review, 81: 938 - 945.
[19] Lau, L.J. 1982. On identifying the degree of competitiveness from industry price and output data. Economics Letters, 10: 93 - 99.
[20] Marshall, A. 1890. Principles of economics. Available at: https://en.wikipedia.org/wiki/Principles_of_ Economics_(Marshall)
[21] Matutes, C., Vives, X. 1996. Competition for deposits, fragility, and insurance. Journal of Financial Intermediation, 5: 184-216.
[22] Molyneux, P., Lloyd-Williams, D.M., Thornton, J. 1994. Competitive conditions in European banking. Journal of Banking and Finance, 18: 445 - 459.
[23] Molyneux, P., Thornton, J., Lloyd-Williams, D.M. 1996. Competition and market contestability in Japanese commercial banking. Journal of Economics and Business, 48: 33--45.
[24] Murinde, M.K.V., Zhao, T. 2007. Competitive conditions among the major British banks. Journal of Banking et Finance, 31(7): 2025 - 2042.
[25] Nathan, A., Neave, E.H. 1989. Competition and contestability in Canada's financial system: Empirical results. Canadian Journal of Economics, 22: 576 - 594.
[26] Neumark, D., Sharpe, S.A. 1992. Market structure and the nature of price rigidity: Evidence from the market for consumer deposits. Quarterly Journal of Economics, 107: 657 - 680.
[27] Panzar, J.C., Rossee, J.N. 1987. Testing for monopoly equilibrium. Journal of Industrial Economics, 35: 443--456.
[28] Rime, B. 1999. Mesure du degré de concurrence dans le système bancaire Suisse A L'aide Du Modèle De Panzar Et Rossee. Revue Suisse D'Economie Politique Et De Statistique, 135 (1): 21 - 40.
[29] Shaffer, S. 1982. Anon-structural test for competition in financial markets. In Bank Structure and Competition Conference Proceedings, Federal Reserve Bank of Chicago, 225—243 pp.
[30] Shaffer, S. 2004a. Comment on what drives bank competition? Some International Evidence by Stijn Claessens and Luc Laeven. Journal of Money, Credit, and Banking, Volume 2, 36(3): 585--592.
[31] Shaffer, S. 2004b. Patterns of competition in banking. Journal of Economics and Business, 56(4): 287 - 313.
[32] Shepherd, W.G. 1986. Tobin's Q and the structure performance relationship: Comment. American Economic Review, 76: 1205 - 1210.
[33] Smirlock, M. 1985. Evidence on the (non) relationship between concentration and profitability in banking. Journal of Money, Credit, and Banking, 17: 69 - 83.
[34] Smirlock, M., Gilligan, T., Marshall, W. 1984. Tobin's Q and the structure-performance relationship. American Economic Review, 74: 1051--1060.
[35] Staikouras, C., Koutsomanoli-Fillipaki, A. 2006. Competition and concentration in the new European banking landscape. European Financial Management, 12(3): 443--482.
[36] Trivieri, F. 2007. Does Crosse-ownership affect competition? Evidence from the Italian banking industry. Journal of International Financial Markets, Institutions and Money, 17(1): 79--101.
[37] Utero-Gonzales, N. 2004. Banking competition in UK and Spain: Is there a euro effect? In FMA European Conference.
[38] Vesala, J. 1995. Testing for competition in banking: Behavioral evidence from Finland. Scientific Monographs from Bank of Finland. ISBN: 951-686-447-3, 206 p.
[39] Weill, L. 2004. On the relationship between competition and efficiency in the EU banking sector. Kredit und Kapital, 37(3): 329--352.
[40] Yeyati, E.L., Micco, A. 2007. Concentration and foreign penetration in Latin American banking sector: Impact on competition and risk. Journal of Banking and Finance, 31(6): 1633 - 1647.
[41] Yuan, Y. 2006. The state of competition of the Chinese banking industry. Journal of Asian Economics, 17(3): 519--534.
Published
2020-02-03
How to Cite
FIRANO, Zakaria; FILALI, Fatine. Competition and Financial Stability: A new Paradigm. Journal of Advanced Studies in Finance, [S.l.], v. 10, n. 2, p. 109-122, feb. 2020. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/4314>. Date accessed: 23 jan. 2022. doi: https://doi.org/10.14505//jasf.v10.2(20).04.
Section
Journal of Advanced Studies in Finance