Does market competition contribute to the banking stability of South Asian emerging economies?

Abstract

We investigate the impact of competition among South Asian banks on their financial stability, focusing on those operating in India, Pakistan, and Sri Lanka. Utilizing annual data from 121 banks spanning the period 2011-2021, we specifically choose the post-global financial crisis era to explore the lessons learned by banks from the 2007–2008 global financial crisis. Our objective is to understand how these banks sustain their stability by maintaining an optimal level of competition. Our study is unique in that it employs the large dataset of three countries and uses Lerner index and the adjusted Lerner index to capture the broader dimensions of South Asian financial stability. Bank-level Z-scores is used to measure the stability of the banks. Our findings reveal strong evidence of competition among South Asian banks contributing to the sustainability of their financial stability. We conclude that maintaining an optimal level of competition helps protect the South Asian banking system from the vulnerable and spillover effects of potential financial crises.