Impact of Interest Margin, Market Power and Diversification Strategy on Banking Stability: Evidence from ASEAN-4

Abstract

Manuscript type: Research Paper
Research aims: This study aims to examine the impact of interest
margin, market power and banking diversification strategy in
products and loan portfolios on banking stability in the ASEAN-4
countries (Indonesia, Malaysia, Thailand and the Philippines).
Design/ Methodology/ Approach: The long-term equilibrium is
examined with the random effect panel data regression model
while the short-term dynamic relationship between the variables
is examined through the dynamic panel data regression model,
System Generalized Method of Moment (GMM).
Research findings: After controlling foreign bank penetration, bankspecific
variables and macroeconomic variables, this study finds that
the intermediary activities which generate interest margins remain
as a dominating factor that promotes banking stability in ASEAN-4.
This study also finds pure fee-based income products can help banks
to reduce instability although an increase in trading activities tend to
reduce stability. Additionally, focused-banks which channel special types of loans may charge a higher margin thereby, lowering the
banks’ probability of default. An increase in market power, as an
impact on banking consolidation, increases banking stability. This
finding is consistent with the “competition fragility” hypothesis.
However, this is unable to support the non-linear relationship
between competition and banking stability.
Theoretical contributions/ Originality: This study contributes to
literature by examining the combined effect of interest margin,
market power and revenue and loan portfolio diversification on
banking stability in ASEAN-4
Practitioner/ Policy implications: Product diversification increases
banking stability but banks need to exercise a prudent approach in
executing trading activities. The lack of expertise in these activities
will increase banking instability. Regulators should scrutinise the
cartel-formation behaviour of larger banks so as to encourage more
competition and avoid instability in the banking industry.
Research limitations/ Implications: This research applies common
practices in the measurement of banking stability namely, the Z
score. Future studies may use a combination of data drawn from
capital market capitalisations of bank assets and market stability to
measure the modified Z score as a means to assess market feedback.