Abstract:

Despite regulatory oversight being considered one of the root causes of the 2008-2009 Global financial crisis, the role of bank regulation on stability is controversial in theory and evidence. Observations show that regulation affects bank stability through the competition channel. However, the impact of bank regulation on competition is not fully captured in empirical studies, especially in a unique banking setting. This research gap motivated me to investigate how bank regulations and supervision impact competition in the founding five member countries of the Association of Southeast Asian Nations (ASEAN-5). This study uses various measures of bank regulation, such as Capital regulation, activity restrictions, deposit insurance, and official supervision, which are constructed using data from five World Bank's bank regulation and supervision surveys. Competition is measured with H-statistic, Lerner Index, large three banks concentration ratio, and Herfindahl Hirschman Index. The dataset includes 3,548 bank-year observations from 268 commercial banks over the period from 1990 to 2022. The two-step system Generalized Method of Moments (GMM), controlling a number of bank level and macroeconomic control variables, indicates that capital regulation, deposit insurance, and official supervision increase competition, while activity restrictions decrease competition in the region. Furthermore, despite the financial crisis, including the Covid-19 pandemic, leading to reduced bank competition in the region, deposit insurance has been found to promote competition during crisis periods. The results remain consistent across different specifications, data subsets, channel analysis, and data distribution. Additionally, quantile regression results show that the impact of bank regulation and supervision on competition is uniform across different quantiles of the distribution. Overall, the findings of this study have significant policy implications for bank regulators and policymakers, particularly in terms of setting appropriate regulations to manage competition in the banking industry during both crisis and non-crisis periods.

Primary Track: Financial Management

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Dr. Abu Noman