Nonlinearity of Competition-Stability Nexus: Evidence from Bangladesh

Abstract

Financial deregulation since the 1980s has been stimulating fierce competition among banks and influencing financial stability across the world. In pace with this, Bangladesh's banking industry is also experiencing intense competition since it is composed of many banks. The empirical evidence on competition and stability widely debate to date, perhaps for not considering the potential nonlinearity. Therefore, our study aims to explore the nonlinear impact of competition on the financial stability of Bangladeshi banks over 2010-2017. For achieving this objective, we compute the Boone indicator and Z-score using bank-level data to measure competition and stability, respectively, and examine the nonlinear dynamics of competition-stability nexus employing threshold analysis in a panel setup. Our findings confirm that the competition-stability relationship is nonlinear and implies that financial stability is more substantial (weaker) in a less (more) competitive market. Our results bear specific policy implications. JEL Classification:  G21, G28 How to Cite: Dutta, K. D., & Saha, M. (2021). Nonlinearity of Competition-Stability Nexus: Evidence from Bangladesh. Etikonomi , 20 (1), 55 – 66. https://doi.org/10.15408/etk.v20i1.15984.