Competition and Banking Stability: A Nonlinear Relationship?

Abstract

This paper examines the impact of competition on banking stability in 30 Vietnamese commercial banks from 2005 to 2022. The Lerner index is employed to measure bank competition, while banking stability is assessed using two Z-score indicators (ZROA and ZROE). Applying the System GMM (SGMM) method to panel data, the study finds an inverted U-shaped relationship between competition and banking stability, with an inflection point at a Lerner index of approximately 0.13. Additionally, bank-specific characteristics and macroeconomic factors significantly influence banking stability. These findings offer valuable insights for regulators and Vietnamese commercial banks in formulating policies and strategies to maintain optimal competition levels, thereby enhancing banking stability.