Competition, diversification and performance in dual banking: A panel VAR analysis

Sahul Hamid, Fazelina; Ibrahim, Mansor H.

Abstract

This article investigates the dynamic relationship among competition, diversification and bank performance using data for 18 countries with a dual banking system over the period 2000 to 2016. Analyses using panel vector autoregression (P.V.A.R.) model, impulse response function (I.R.F.) and variance decomposition (V.D.C.) methods confirm that market power increases the profitability and the stability of banks the dual banking system while revenue diversification reduces them. Market power increases revenue diversification of banks. Segregating the sample of banks into emerging and developing countries, we find that positive impact of market power on profitability is stronger for emerging countries. Even though we find that revenue diversification has a more damaging effect on the profitability of banks in the developing countries, it only dampens the stability of banks in emerging countries. In addition, we find that asset diversification dampens the stability of banks. However, it has a more positive impact on the profitability of banks in emerging economies.

• Journal Article Type: Article
• Acceptance Date: Jun 9, 2020
• Online Publication Date: Sep 2, 2020
• Publication Date: Jan 1, 2021
• Deposit Date: Jan 20, 2023
• Publicly Available Date: Jan 20, 2023
• Journal: Economic Research-Ekonomska Istrazivanja
• Print ISSN: 1331-677X
• Electronic ISSN: 1848-9664
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 34
• Issue: 1
• Pages: 194-220
• DOI: https://doi.org/10.1080/1331677X.2020.1782242
• Keywords: Economics and Econometrics; competition; diversification; bank performance; stability; dual banking
• Public URL: https://uwe-repository.worktribe.com/output/10307887
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/1331677X.2020.1782242
• Additional Information: In line with the literature, a three-year window is used for the standard deviations of R.O.A. to allow for variations in the Z-Score value.