Evaluating the Relationship Between Banking Sector Competition and Financial Stability in Emerging Economies
Posted: Nov 05, 2022
Abstract
The relationship between banking sector competition and financial stability represents one of the most debated topics in financial economics, particularly in the context of emerging economies where financial systems are undergoing rapid transformation. Traditional economic theory presents competing hypotheses regarding this relationship, with some scholars arguing that increased competition enhances efficiency and innovation while others contend that it may encourage excessive risk-taking and undermine stability. This research addresses a critical gap in the existing literature by developing a comprehensive analytical framework specifically tailored to the unique institutional and structural characteristics of emerging economies. Emerging economies present distinctive challenges and opportunities for financial sector analysis due to their evolving regulatory frameworks, varying levels of institutional development, and dynamic market structures. The conventional approaches to measuring competition and stability, primarily developed for mature financial systems, often fail to capture the complex interdependencies and non-linear relationships that characterize banking sectors in developing countries. Our research addresses this limitation by proposing a novel methodological approach that integrates multiple dimensions of competition and stability while accounting for the institutional context specific to emerging markets. This study makes several original contributions to the field. First, we develop a multi-dimensional financial stability index that incorporates both traditional financial soundness indicators and institutional resilience factors. Second, we introduce a competition measurement framework that captures market structure dynamics unique to emerging economies. Third, we employ a hybrid analytical approach.
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