Market Structure and Financial Stability of Vietnamese Banks: Evidence from Structural and Non-Structural Approaches

Abstract

This study aims to examine the impact of market structure on the financial stability of the Vietnamese banking system. The two-step system generalized method of moments (GMM) is applied to conduct regression analysis with a sample of 30 banks from 2007 to 2021. The study approaches market structure through bank competition/market power and concentration, using different measures based on the Herfindahl-Hirshchman index and the market share of the leading banks (structural approach) and the Lerner index (non-structural approach). Financial stability is measured using the Z-score index. The results indicate that greater market power leads to higher bank stability and reduces overall risk exposure. In other words, the results suggest that higher competition may undermine bank stability. However, the results also indicate that increased concentration leads to less financial stability and increased bank insolvency risk. From these results, the paper points out policy implications to help increase the stability of the Vietnamese banking system.