Bank Concentration and Bank Stability during the COVID-19 Pandemic

Sukisno Selamet Riadi, Michael Hadjaat, Rizky Yudaruddin

Abstract


Objectives: The banking sector has been impacted more negatively by the COVID-19 pandemic. At the same time, bank concentration and capitalization stabilize banking systems during times of crisis. This study evaluated the monthly financial reports of all commercial banks in Indonesia to investigate the joint impact of the COVID-19 pandemic and bank concentration on bank stability. Moreover, this study was conducted to determine whether adequate capitalization could enhance the positive effect of the interaction between COVID-19 and bank concentration during the pandemic. Methods/Analysis: Using 108 commercial banks between March 2020 and May 2021, data were analyzed using the fixed-effects estimator with heteroskedasticity and within-panel serial correlations for robust standard errors. Several robustness checks were performed to ensure that the results were accurate and consistent. Findings: Subsequently, the impact of the pandemic and bank concentration was determined to be significant and adverse, though their interplay was strong enough to promote bank stability. This highlights the importance of adequate capitalization in enhancing the beneficial effects of the interaction between COVID-19 and bank concentration on bank stability. Novelty /Improvement: Hence, these findings contribute to the literature on bank stability and have important policy implications for the banking sector during this pandemic.

JEL Classifications: E51, G20, G21.

 

Doi: 10.28991/esj-2022-SPER-018

Full Text: PDF


Keywords


COVID-19; Bank Concentration; Bank Stability; Banking Sector; Financial Market.

References


Baldwin, R., & Di Mauro, B. W. (2020). Economics in the time of COVID-19: A new eBook. Center for Economic Policy Research (CEPR), London, United Kingdom. Available online: https://cepr.org/voxeu/columns/economics-time-covid-19-new-ebook (accessed on March 2022).

Lestari, D., Zainurossalamia, S. Z. A., Maria, S., Wardhani, W., & Yudaruddin, R. (2021). The impact of COVID-19 pandemic on performance of small enterprises that are e-commerce adopters and non-adopters. Problems and Perspectives in Management, 19(3), 467–477. doi:10.21511/ppm.19(3).2021.38.

Riadi, S. S., Heksarini, A., Lestari, D., Maria, S., Zainurossalamia, S., & Yudaruddin, R. (2022). The Benefits of e-Commerce before and during the Covid-19 Pandemic for Small Enterprises in Indonesia. WSEAS Transactions on Environment and Development, 18, 69–79. doi:10.37394/232015.2022.18.8.

IMF (International Monetary Fund). (2020). World Economic Outlook, April 2020: The Great Lockdown. Available online: www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020 (accessed on June 2022).

Fernandes, N. (2020). Economic effects of coronavirus outbreak (COVID-19) on the world economy. IESE Business School Working Paper No. WP-1240-E, SSRN Electronic Journal. doi:10.2139/ssrn.3557504.

Rizwan, M. S., Ahmad, G., & Ashraf, D. (2020). Systemic risk: The impact of COVID-19. Finance Research Letters, 36, 101682. doi:10.1016/j.frl.2020.101682.

Baker, S. R., Bloom, N., Davis, S. J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The unprecedented stock market reaction to COVID-19. The Review of Asset Pricing Studies, 10(4), 742–758. doi:10.1093/rapstu/raaa008.

Ali, M., Alam, N., & Rizvi, S. A. R. (2020). Coronavirus (COVID-19) — An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance, 27(100341). doi:10.1016/j.jbef.2020.100341.

Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36. doi:10.1016/j.frl.2020.101528.

Wu, J., Yao, Y., Chen, M., & Jeon, B. N. (2020). Economic uncertainty and bank risk: Evidence from emerging economies. Journal of International Financial Markets, Institutions and Money, 68, 101242. doi:10.1016/j.intfin.2020.101242.

Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets, Institutions and Money, 72, 101322. doi:10.1016/j.intfin.2021.101322.

Ozsoy, S. M., Rasteh, M., Yönder, E., & Yucel, M. (2020). COVID-19 Impacts on Bank Stability in a Liquidity-Backed Environment. SSRN Electronic Journal. doi:10.2139/ssrn.3713526.

Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581–1603. doi:10.1016/j.jbankfin.2005.05.010.

Chang, E. J., Guerra, S. M., Lima, E. J. A., & Tabak, B. M. (2008). The stability-concentration relationship in the Brazilian banking system. Journal of International Financial Markets, Institutions and Money, 18(4), 388–397. doi:10.1016/j.intfin.2007.04.004.

Yeyati, E. L., & Micco, A. (2007). Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk. Journal of Banking & Finance, 31(6), 1633–1647. doi:10.1016/j.jbankfin.2006.11.003.

Ben Ali, M. S., Intissar, T., & Zeitun, R. (2018). Banking Concentration and Financial Stability. New Evidence from Developed and Developing Countries. Eastern Economic Journal, 44(1), 117–134. doi:10.1057/eej.2016.8.

De Nicoló, G., Bartholomew, P., Zaman, J., & Zephirin, M. (2004). Bank consolidation, internationalization, and conglomeration: Trends and implications for financial risk. Financial Markets, Institutions and Instruments, 13(4), 173–217. doi:10.1111/j.0963-8008.2004.00076.x.

Uhde, A., & Heimeshoff, U. (2009). Consolidation in banking and financial stability in Europe: Empirical evidence. Journal of Banking & Finance, 33(7), 1299–1311. doi:10.1016/j.jbankfin.2009.01.006.

IJtsma, P., Spierdijk, L., & Shaffer, S. (2017). The concentration–stability controversy in banking: New evidence from the EU-25. Journal of Financial Stability, 33, 273–284. doi:10.1016/j.jfs.2017.06.003.

Soedarmono, W., Machrouh, F., & Tarazi, A. (2013). Bank competition, crisis and risk taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions and Money, 23(1), 196–221. doi:10.1016/j.intfin.2012.09.009.

Caballero, R. J., & Simsek, A. (2011). Complexity and Financial Panics. SSRN Electronic Journal. doi:10.2139/ssrn.1414382.

Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises?. Journal of Financial Economics, 109(1), 146–176. doi:10.1016/j.jfineco.2013.02.008.

Garel, A., & Petit-Romec, A. (2017). Bank capital in the crisis: It’s not just how much you have but who provides it. Journal of Banking & Finance, 75, 152–166. doi:10.1016/j.jbankfin.2016.11.009.

Demirgüç-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98(3), 626–650. doi:10.1016/j.jfineco.2010.06.004.

Beltratti, A., & Stulz, R. M. (2012). The credit crisis around the globe: Why did some banks perform better? Journal of Financial Economics, 105(1), 1–17. doi:10.1016/j.jfineco.2011.12.005.

Farooq, U., Tabash, M. I., Anagreh, S., & Alnahhal, M. (2021). Assessing the Impact of COVID-19 on Corporate Investment Behavior. Emerging Science Journal, 5, 130–140. https://doi.org/10.28991/esj-2021-sper-11.

Yusgiantoro, I., Soedarmono, W., & Tarazi, A. (2019). Bank consolidation and financial stability in Indonesia. International Economics, 159, 94–104. doi:10.1016/j.inteco.2019.06.002.

Dahl, J., Giudici, V., Sengupta, J., Kim, S., & Ng, E. (2019). Bracing for consolidation: The quest for scale. Asia-Pacific Banking Review 2019, McKinsey & Company, Atlanta, United States.

Schell, D., Wang, M., & Huynh, T. L. D. (2020). This time is indeed different: A study on global market reactions to public health crisis. Journal of Behavioral and Experimental Finance, 27, 100349. doi:10.1016/j.jbef.2020.100349.

Heyden, K. J., & Heyden, T. (2021). Market reactions to the arrival and containment of COVID-19: An event study. Finance Research Letters, 38. doi:10.1016/j.frl.2020.101745.

Salisu, A. A., & Vo, X. V. (2020). Predicting stock returns in the presence of COVID-19 pandemic: The role of health news. International Review of Financial Analysis, 71, 101546. doi:10.1016/j.irfa.2020.101546.

Erdem, O. (2020). Freedom and stock market performance during Covid-19 outbreak. Finance Research Letters, 36, 101671. doi:10.1016/j.frl.2020.101671.

Narayan, P. K., Phan, D. H. B., & Liu, G. (2021). COVID-19 lockdowns, stimulus packages, travel bans, and stock returns. Finance Research Letters, 38, 101732. doi:10.1016/j.frl.2020.101732.

Baek, S., Mohanty, S. K., & Glambosky, M. (2020). COVID-19 and stock market volatility: An industry level analysis. Finance Research Letters, 37, 101748. doi:10.1016/j.frl.2020.101748.

Ashraf, B. N. (2020). Stock markets’ reaction to COVID-19: Cases or fatalities? Research in International Business and Finance, 54, 101249. doi:10.1016/j.ribaf.2020.101249.

Al-Awadhi, A. M., Alsaifi, K., Al-Awadhi, A., & Alhammadi, S. (2020). Death and contagious infectious diseases: Impact of the COVID-19 virus on stock market returns. Journal of Behavioral and Experimental Finance, 27, 100326. doi:10.1016/j.jbef.2020.100326.

Topcu, M., & Gulal, O. S. (2020). The impact of COVID-19 on emerging stock markets. Finance Research Letters, 36, 101691. doi:10.1016/j.frl.2020.101691.

Mazur, M., Dang, M., & Vega, M. (2021). COVID-19 and the march 2020 stock market crash. Evidence from S&P1500. Finance Research Letters, 38, 101690. doi:10.1016/j.frl.2020.101690.

Othman, A. H. A., Haron, R., & Kassim, S. (2022). Stock Market Volatility Following Uncertainty of COVID-19 Outbreak: News Impact Curve Analysis Approach. Towards a Post-Covid Global Financial System, 271–290. Emerald Publishing Limited, Bingley, United Kingdom. doi:10.1108/978-1-80071-625-420210015.

He, P., Sun, Y., Zhang, Y., & Li, T. (2020). COVID–19’s Impact on Stock Prices Across Different Sectors—An Event Study Based on the Chinese Stock Market. Emerging Markets Finance and Trade, 56(10), 2198–2212. doi:10.1080/1540496X.2020.1785865.

Cepoi, C. O. (2020). Asymmetric dependence between stock market returns and news during COVID-19 financial turmoil. Finance Research Letters, 36, 101658. doi:10.1016/j.frl.2020.101658.

Anh, D. L. T., & Gan, C. (2020). The impact of the COVID-19 lockdown on stock market performance: evidence from Vietnam. Journal of Economic Studies, 48(4), 836–851. doi:10.1108/JES-06-2020-0312.

Alfaro, L., Chari, A., Greenland, A., & Schott, P. (2020). Aggregate and Firm-Level Stock Returns During Pandemics. SSRN Electronic Journal. doi:10.2139/ssrn.3562034.

Demirgüç-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2021). Banking sector performance during the COVID-19 crisis. Journal of Banking and Finance, 133, 106305. doi:10.1016/j.jbankfin.2021.106305.

Wu, D. D., & Olson, D. L. (2020). The effect of COVID-19 on the banking sector. In Pandemic risk management in operations and finance, 89-99. Springer, Cham, Switzerland. doi:10.1007/978-3-030-52197-4_8.

Li, X., Xie, Y., & Lin, J. H. (2021). COVID-19 outbreak, government capital injections, and shadow banking efficiency. Applied Economics, 53(4), 495–505. doi:10.1080/00036846.2020.1808183.

Duan, Y., El Ghoul, S., Guedhami, O., Li, H., & Li, X. (2021). Bank systemic risk around COVID-19: A cross-country analysis. Journal of Banking & Finance, 133, 106299. doi:10.1016/j.jbankfin.2021.106299.

Carletti, E., Claessens, S., Fatás, A., & Vives, X., (2020). The bank business model in the post-Covid-19 world. Center for Economic Policy Research (CEPR), London, United Kingdom. Available online: https://cepr.org/voxeu/columns/bank-business-model-post-covid-19-world (accessed on March 2022).

Demir, E., & Danisman, G. O. (2021). Banking sector reactions to COVID-19: The role of bank-specific factors and government policy responses. Research in International Business and Finance, 58, 101508. doi:10.1016/j.ribaf.2021.101508.

Kozak, S. (2021). The impact of covid‐19 on bank equity and performance: the case of central eastern south european countries. Sustainability (Switzerland), 13(19), 11036. doi:10.3390/su131911036.

Aldasoro, I., Fender, I., Hardy, B., & Tarashev, N. (2020). Effects of Covid-19 on the banking sector: the market's assessment. BIS Bulletin, 12, Bank for International Settlements (BIS), Basel, Switzerland.

Saif-Alyousfi, A. Y. H., Saha, A., & Md-Rus, R. (2020). The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries. North American Journal of Economics and Finance, 51, 100867. doi:10.1016/j.najef.2018.10.015.

Yudaruddin, R. (2022). Bank Concentration and Stability in Central Asia: the Effect of Capital Regulation and Financial Freedom. Journal of Eastern European and Central Asian Research, 9(2), 206–216. doi:10.15549/jeecar.v9i2.733.

Maria, S., Yudaruddin, R., & Yudaruddin, Y. A. (2022). The impact of COVID-19 on bank stability: Do bank size and ownership matter? Banks and Bank Systems, 17(2), 124–137. doi:10.21511/bbs.17(2).2022.11.

Scherf, M., Matschke, X., & Rieger, M. O. (2022). Stock market reactions to COVID-19 lockdown: A global analysis. Finance Research Letters, 45, 102245. doi:10.1016/j.frl.2021.102245.

Allen, F. (1990). The market for information and the origin of financial intermediation. Journal of Financial Intermediation, 1(1), 3–30. doi:10.1016/1042-9573(90)90006-2.

Demirguc-Kunt, A., Detragiache, E., & Merrouche, O. (2010). Bank capital: lessons from the financial crisis. 2010. Policy Research Working Paper Series, 5473, The World Bank, Washington, United States.

Altunbas, Y., Manganelli, S., & Marques-Ibanez, D. (2021). Bank Risk During the Financial Crisis: Do Business Models Matter? SSRN Electronic Journal. doi:10.2139/ssrn.1945143.

Berger, A. N., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking & Finance, 21(6), 849–870. doi:10.1016/S0378-4266(97)00003-4.

Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking & Finance, 35(5), 1315–1326. doi:10.1016/j.jbankfin.2010.10.005.

Altunbas, Y., Carbo, S., Gardener, E. P. M., & Molyneux, P. (2007). Examining the relationships between capital, risk and efficiency in European banking. European Financial Management, 13(1), 49–70. doi:10.1111/j.1468-036X.2006.00285.x.

Santoso, W., Yusgiantoro, I., Soedarmono, W., & Prasetyantoko, A. (2021). The bright side of market power in Asian banking: Implications of bank capitalization and financial freedom. Research in International Business and Finance, 56, 101358. doi:10.1016/j.ribaf.2020.101358.

Wagner, W. (2007). The liquidity of bank assets and banking stability. Journal of Banking & Finance, 31(1), 121–139. doi:10.1016/j.jbankfin.2005.07.019.

Ali, M., & Puah, C. H. (2018). Does Bank Size and Funding Risk Effect Banks’ Stability? A Lesson from Pakistan. Global Business Review, 19(5), 1166–1186. doi:10.1177/0972150918788745.


Full Text: PDF

DOI: 10.28991/esj-2022-SPER-018

Refbacks

  • There are currently no refbacks.


Copyright (c) 2021 rizky yudaruddin