Competition and bank financial stability: evidence from an emerging economy

Nguyen, Dat T.; Le, Tu DQ.; Tran, Son Article Competition and bank financial stability: evidence from an emerging economy Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Nguyen, Dat T.; Le, Tu DQ.; Tran, Son (2024) : Competition and bank financial stability: evidence from an emerging economy, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-16, https://doi.org/10.1080/23311975.2024.2365422 This Version is available at: https://hdl.handle.net/10419/326339 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Competition and bank financial stability: evidence from an emerging economy Dat T. Nguyen, Tu DQ. Le & Son Tran To cite this article: Dat T. Nguyen, Tu DQ. Le & Son Tran (2024) Competition and bank financial stability: evidence from an emerging economy, Cogent Business & Management, 11:1, 2365422, DOI: 10.1080/23311975.2024.2365422 To link to this article: https://doi.org/10.1080/23311975.2024.2365422 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 18 Jun 2024. Submit your article to this journal Article views: 2163 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Banking & Finance | ReseaRch aRticle Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2365422 Competition and bank financial stability: evidence from an emerging economy Dat t. nguyena,b , tu DQ. lea,b and son trana,b auniversity of economics and Law, Ho Chi Minh City, Vietnam; bVietnam national university, Ho Chi Minh City, Vietnam ABSTRACT this article aims to empirically examine the role of competition and concentration on Vietnamese bank stability efficiency in Vietnam using data from 25 commercial banks from 2007 to 2020 using the tobit regression method is utilized. the results suggest that banks exhibit greater stability in a highly competitive environment. this connection between competition and the efficiency of Vietnamese banks remains significant even amidst financial crises. Furthermore, we employ various alternative risk indicators and exclude state-owned banks from our sample to reassess the nexus between competition and bank stability efficiency, with results that remain steadfastly robust. this study represents a pioneering endeavor to investigate the impact of competition on bolstering banks’ stability through the utilization of the stochastic frontier approach. Our study findings suggest that the implementation of expansion policies that promote competition can improve the efficiency of bank stability in developing markets. 1. Introduction it is widely recognized that a robust financial system is essential for the advancement and growth of economies. a key factor influencing global shifts was the aim to boost the banking sector’s competitive edge (Delis, 2012). Yet, the notion that competition benefits all sectors universally might not be as firmly rooted in the banking industry as it is in other areas (claessens & laeven, 2004). Despite thorough investigations, consensus on how competition affects bank stability remains elusive. the academic field presents two diverging views. initially proposed by keeley (1990), the competition-fragility or competition-instability viewpoint suggests that increased competition in the banking sector reduces banks’ market power, cuts into their profit margins, and decreases the value of their franchises, pushing them toward higher risk-taking. conversely, the competition-stability argument, significantly advanced by Boyd and De nicoló (2005), maintains that competition actually promotes stability within banks. in the past two decades, the landscape of competition within the commercial banking sector has undergone significant transformation. Factors, such as the liberalization, deregulation and privatization of the financial market have played pivotal roles in shaping these changes. these developments have not only intensified competition within the banking sector but have also brought into play external competitors, primarily non-banking financial institutions and market-based financing options. the thrust of financial sector reforms has been toward broadening the scope of various segments of the financial market, including the insurance industry, mutual funds, equity and debt markets and non-bank financial entities. these changes have collectively contributed to heightened competition across the board (Prakash et al., 2022; turk ariss, 2010). Furthermore, empirical evidence from different nations presents a varied set of © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group CONTACT Dat t. nguyen [email protected].edu.vn; tu DQ Le [email protected] https://doi.org/10.1080/23311975.2024.2365422 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY Received 4 January 2024 Revised 12 april 2024 accepted 30 May 2024 REVIEWING EDITOR David McMillan, University of stirling, United kingdom of great Britain and northern ireland KEYWORDS competition; bank risk-taking; stability efficiency; lerner index; Vietnam JEL CLASSIFICATION g21; g32; g34 SUBJECTS Finance; Banking; Financial Management; Risk Management 2 D. t. ngUYen etal. outcomes, indicating a lack of conclusive data on how competition influences the stability of banks. this ambiguity underscores the need for further exploration into this compelling area. consequently, this has drawn the attention of researchers, policymakers and regulatory bodies toward uncovering the dynamics that ensure bank stability amidst growing competitive pressures. Vietnam has been chosen as the object for this analysis for several reasons. the country’s economy has seen impressive performance, establishing itself as a key player within the association of southeast asian nations (asean). it has achieved an average annual growth rate of 6.02% from 2007 to 2020. given the relatively nascent state of its financial system, the banking sector has been instrumental in driving the country’s notable economic expansion. additionally, the entry of Vietnam into the World trade Organization (WtO) in 2007 marked the beginning of increased competitive dynamics among banks. in recent years, financial technology entities and payment service companies have gained prominence, positioning themselves as formidable competitors against traditional banks. this evolving landscape, as highlighted by Danisman (2018), has intensified the competitive pressures on established commercial banks. thus, it becomes crucial to examine the impact of competition on the efficiency and stability of banks in Vietnam. this study breaks new ground by investigating the link between bank competitiveness and stability in a growing economy, enriching academic discussions with fresh insights. it revisits the connection between competitiveness and stability, employing both traditional and efficiency-adjusted lerner indices for market power, and moving beyond conventional risk metrics like nonperforming loans (nPls) ratio or Z-scores. acknowledging the limitations highlighted by Fan etal. (2019) and tan (2016), and the critique of Z-score’s predictive accuracy by tabak etal. (2012), this research employs a stochastic frontier approach to assess bank stability and re-examine competitiveness and risk in Vietnam’s banking sector. this contribution is pivotal, addressing research gaps and offering significant implications for banking management and regulation. Our research assesses a group of 25 commercial banks in Vietnam spanning from 2007 to 2020 to investigate the effects of competition on bank risk-taking. the results suggest that banks exhibit greater stability in environments with higher levels of competition and concentration. Furthermore, our findings demonstrate that this relationship remains valid even during times of financial crisis. additionally, we utilize various alternative measures of risk while excluding state-owned banks from our analysis to re-evaluate the connection between competition and bank stability efficiency; these results remain strong and reliable. the remaining sections of this article are organized as follows: section 2 provides a succinct overview of the current literature. in section 3, we explicate our methodology and data sources. empirical findings are presented in section 4, with concluding remarks offered in section 5. 2. Literature review 2.1. The link between competition and bank stability the correlation between competition and bank stability can be mainly categorized into two divergent viewpoints. 2.1.1. Competition-fragility the competition-fragility perspective asserts as heightened levels of competition are associated with the instability of banking sectors. according to the research conducted by keeley (1990), the lack of regulation and elimination of interest rate ceilings within the banking sector of the United states during the 1970s and 1980s served as a catalyst for banks to partake in ventures that carried inherent risks. consequently, this led to the occurrence of numerous instances of bank failures. this viewpoint is founded upon the correlation between a bank’s franchise value and its propensity for engaging in risky activities. according to northcott (2004), banks modify the level of risk in their investments in reaction to the degree of competition they encounter. as the level of competition intensifies, the profitability and franchise value of banks diminish. this phenomenon offers bank managers with gambling incentives, as it reduces their potential losses in the event of a decline in the value of their franchise. consequently, cOgent BUsiness & ManageMent 3 bank managers may opt for investments with higher levels of risk, engage in reckless decisions regarding lending, and exhibit a more lenient approach toward choosing investments and requirements for lending (li, 2019; northcott, 2004; saif-alyousfi et al., 2020). according to soedarmono etal. (2011), it is widely believed that franchise value serves as an effective mechanism for ensuring self-discipline among bank managers. Bank managers are motivated to make cautious investment decisions, maintain higher capital buffers, and enhance loan monitoring and screening activities due to the elevated opportunity cost of bankruptcy that is linked to a greater franchise value (akins et al., 2016; Fu et al., 2014; Rakshit & Bardhan, 2019). the competition-fragility view posits that banks, in response to heightened competition, may relax their lending standards and allocate insufficient resources to the evaluation and supervision of borrowers. this behavior is driven by the banks’ desire to retain their current customer base and attract new customers. however, these actions can ultimately result in an elevated risk of bank insolvency (Danisman & Demirel, 2019; sinha & sharma, 2016). Furthermore, Petersen and Rajan (1995) noted that the competition-fragility paradigms exacerbated by the lack of relationship lending incentives. Relationship lending involves building and maintaining long-term, mutually beneficial customer relationships. Despite the high cost, cultivating relationships has been shown to benefit banks financially. this is because valuable and exclusive borrower information improves screening and monitoring (northcott, 2004). Due to increased competition, banks may have less incentive to cultivate customer relationships. this is because businesses cannot make as much money from these customers (Beck et al., 2013). Financial institutions struggle to recover the costs of nurturing relationships with borrowers in a competitive banking industry because borrowers tend to switch funding sources. Reduced bank oversight and assessment of borrowers can increase bank default risk and suboptimal capital allocation (northcott, 2004; turk ariss, 2010). a lot of empirical evidence supports the competition fragility perspective. Fungáčová and Weill (2013) found that increased competition in the Russian banking sector between 2001 and 2007 increased the risk of a banking crisis. Bank concentration was not considered in the researchers’ analysis. kasman and kasman (2015) strongly supported the competition-fragility hypothesis. a panel dataset of 28 turkish commercial banks from 2002 to 2012 was used. a comprehensive analysis of bank-level variation was not done. sinha and sharma (2016) used the h-statistic to assess competition-fragility support in a 2000– 2015 sample of indian scheduled commercial bank. halim etal. (2023) utilized the lerner index and hhi to explore the relationship between competition, ownership structure, and economic growth of banks with credit risk and financial stability in the Middle east and north african (Mena) economies. the results reveal that lower levels of bank competition are associated with lower risk-taking by banks and improved financial stability. srivastava et al. (2023) conducted a study utilizing the lerner and Boone indices to examine the impact of competition on the stability of indian banks. the findings indicate that banks are less stable in environments that are more competitive and concentrated. Bakhouche (2024) investigates the link between competition and stability within tunisia’s banking industry, spanning the years 2005– 2020, to determine the influence of cost efficiency on this dynamic. the findings indicate that competition leads to a decrease in stability, aligning with the competition-fragility hypothesis. H1a: There is a positive relationship between Competition and Vietnamese bank risk-taking. 2.1.2. Competition-stability the competition-stability perspective asserts that a higher level of competition results in a creation of more stable banks. this perspective is grounded in the moral hazard and adverse selection issues that may arise when borrowers possess excessive autonomy in their investment choices. in their study, Boyd and De nicoló (2005) discovered a negative correlation between heightened competition and bank lending rates, indicating that as competition intensifies and lending rates tend to decrease. When borrowers are able to secure loans at lower interest rates, they are less motivated to undertake ventures that involve higher levels of risk, as they are more likely to possess the means to repay their debts. consequently, banks encounter diminished levels of borrower default risk and non-performing loans. according to singla and singh (2019), competition serves as a crucial mechanism for external monitoring. the authors contend that competition serves as a crucial governance mechanism in the 4 D. t. ngUYen etal. oversight and regulation of bank managers. a competitive market diminishes the level of managerial discretion and provides bank managers with incentives to enhance performance, despite the heightened risk of bankruptcy. consequently, this helps to alleviate agency problems. according to the findings of schaeck and cihak (2008), there is empirical support for the notion that competition serves as a catalyst for bank managers to pursue efficiency enhancements. amidu and Wolfe (2013) emphasize that competition plays a significant role in motivating bank managers to engage in diversification strategies, both within and across fee-based income-generating activities, while also assuming diversified risks. thanh etal. (2024) conducted a study on the dynamics between bank competition and stability, specifically within the evolving economic landscape of Vietnam, covering the years 2007–2018. the results indicate a positive correlation, showing that increased competition is associated with enhanced stability among Vietnamese banks. azmi etal. (2024) show that competition has a varied impact on bank stability in dual banking economies, affecting islamic banks positively but showing no effect on conventional banks. the competition-stability perspective is supported by a significant corpus of empirical data. the findings of guo and chai (2024), hussain and Bashir (2020) and li and Peng (2024) study indicate a positive relationship between increased competition and improved stability of chinese banks. Jeon and lim (2013) conducted a study wherein they employed two separate samples of depository institutions in korea for their research. the initial sample comprised of mutual savings banks, encompassing the timeframe spanning from 2003 to 2011. the second sample consisted of commercial banks, covering the time period from 1999 to 2011. the main aim of their inquiry was to examine and contrast the discrepancies between these two classifications of establishments. the observed disparities encompassed a range of factors, such as the structure of ownership, the characteristics of loans, the framework of governance and the treatment by regulatory authorities. the researchers made a discovery that indicates heightened competition has a positive impact on the stability of mutual savings banks, but conversely has a negative impact on the stability of commercial banks. the study conducted by soedarmono et al. (2013) employed data from commercial banks in 11 asian countries. the research findings suggest that an increase in competition between 1994 and 2009 led to improved stability within the banking sector. Furthermore, it has been found that an escalation in market power is positively associated with increased volatility in profitability and a heightened level of risk of insolvency. in addition, it has been found that the moderating impact of competition was less evident in situations where banks obtained subsidies as a result of their ‘too big too fail’ designation from the lender of last resort. akins et al. (2016) conducted a study that investigated the relationship between competition and stability in the commercial banking sector of the United states. the utilization of the herfindahl index was employed to evaluate competition. nevertheless, we argue that this measure inadequately accounts for the competition faced by commercial banks from alternative financial intermediaries. in this context, it may have been more appropriate to consider an alternative metric, such as the lerner index, which directly examines a bank’s conduct, as a potentially more suitable measure for evaluating competition. the study conducted by akins etal. demonstrates that increased competition has a moderating impact on the probability of bank failure and also affects the distribution of resources toward investments with lower levels of risk. the findings of Maji and hazarika (2018) study indicate that there were no statistically significant results when examining the impact of competition on credit risk, as measured by the h-statistic. the absence of statistical significance in the findings was attributed by the researchers to the underlying assumption of long-run equilibrium in the h-statistic. numerous empirical studies have substantiated the competition-stability perspective, as evidenced by the works of Beck et al. (2006), schaeck and cihak (2008), soedarmono et al. (2011), anginer et al. (2014), noman etal. (2018) and li (2019). however, the current body of literature has not yet examined the diversity within banks in any of the aforementioned studies. H1b: There is a negative relationship between Competition and Vietnamese bank risk-taking. cOgent BUsiness & ManageMent 5 3. Data and methodology 3.1. Data the sample utilized in this study comprises 25 Vietnamese commercial banks, spanning the time period from 2007 to 2020. these banks were selected to represent a significant portion, specifically over 80%, of the total assets within the Vietnamese banking industry. Bank-specific data is primarily sourced from annual financial reports, encompassing balance sheets and income statements, which are accessible and can be obtained from the websites of the banks and the database (le et al., 2022)1. the collection of macroeconomic variables is sourced from the World Bank. Furthermore, it is worth noting that the focus of this analysis is solely on commercial banks, as they are the primary and most dynamic players in the Vietnamese market. it is important to acknowledge that foreign bank affiliates and joint-venture banks face certain limitations in their operations within the Vietnam market. as a result of multiple bank mergers during the designated study period, our ultimate data sample consists of an unbalanced panel comprising 350 observations. 4.Variable definitions 4.1. Dependent variable – stability efficiency numerous empirical studies employ the Z-score as a risk/stability indicator in the banking industry, and it is computed by adding a bank’s return on assets and equity to total assets ratio risk (Mirzaei et al., 2013). the Z-score measures the distance from insolvency and is formulated as: Z score ROA E TA ROA it it it it it −= + , ,, , , / σ (1) where ROAit , presents return on assets ratio; the ratio E TA it it,, / denotes the proportion of equity over total assets; σ ROA it , is the standard deviation of return on assets and is calculated using the three-year rolling window. however, research by tan (2016) and Fan etal. (2019) contends that Z-score may not fully reflect the potential stability that each bank might attain. additionally, the deviation between the bank’s current stability and its maximum stability given economic and regulatory conditions should be taken into account. therefore, the term ‘stability inefficiency’ is developed. the extent of stability inefficiency indicates how much a certain bank deviates from the optimal Z-score. in this study, the Vietnamese banks stability inefficiency is estimated on the basis of a translog cost function with one output (total assets), three input prices (price of deposits, price of labor and price of physical capital). the two fixed netputs (fixed assets and total equity), and technical change2 are included to control for observable heterogeneity. this study specifies both these inputs and outputs of banks based on the intermediation theory and banks are viewed as financial intermediaries that convert deposits into loans and other earning assets (sealey & lindley, 1977). all variables in the translog cost function are defined in table 1 below. Table 1. Variables definition for estimating bank stability efficiency. Variable Definition Z scoreit −, the index is obtained from equation (1) Qit (output) total assets W 1 (input price of deposits) the ratio of interest expenses to total deposits W2 (input price of labour) the proportion of personnel expenses/number of employees W3 (input price of physical capital) the proportion of other operating cost to fixed assets Z1 m (Fixed net put 1) Fixed assets Z2 m (Fixed net put 2) total equity Trend technical change ε i error term source: author’s summary. 6 D. t. ngUYen etal. consequently, the specification of the translog cost function is as follows: Ln ln Z score WlnQ lnQ it it it it mn −        =++ () += ∑ 3 01 2 2 1 2 1 2 , αα α β WW W lnZ W W mit it mm mit mj mj mit i 3 1 2 1 2 1 2 3 1 2 , ,         ++ = = = ∑ ∑∑ σγ ln tt jit it mj mj mit jit ln W W lnZ lnZ                 ++ = = ∑∑ 3 1 2 1 2 1 2 , π mm m it mit it mm it mit mj lnQ ln W W lnQ lnZ = = = ∑ ∑∑         ++ 1 2 3 1 2 1 2 δ ε , == ∑        ++ () + 1 2 3 12 2 3 1 2 θ ϕϕ ϕ mj mit it mit W WlnZ Trend Trend T ln , rr e n d l n Q Trend W WTrendlnZ it mm mit it mm +       + = = ∑∑ 1 2 3 1 2 µϑ ln , mm i t i + ε (2) the error term ε i consists of the one-sided time-varying inefficiency component (ui) and the two-sided random error term (vi), which captures the time-invariant heterogeneity as opposed to inefficiency. the inefficiency term (ui) is independently and identically distributed with a non-negative truncated normal distribution and is obtained using the formula proposed by Jondrow etal. (1982). employing the two-step approach (coelli et al., 2005), we estimate the bank stability efficiency scores by extracting them from the error term, specifically ZW E u ii = − ()     exp . a higher stability efficiency score implies the lower level of bank risk and vice versa. α, β, σ, γ, π, δ, ω, θ, φ, μ, and τ are the estimated parameters, respectively. 4.2. Independent variables – competition Researchers use the lerner index to assess bank market power, a widely accepted measure. Due to its advantages over hhi, concentration ratio, and h-statistics, the lerner index is chosen. Blair and sokol (2015) claim that the lerner index is the most widely used economic metric for market power. the proposed method considers pricing power, market contestability and bank revenue, making it more precise than the market concentration method, h-statistic and concentration ratio. coccorese (2009) supports the lerner index’s assessment of banks’ market power, particularly their deviation from monopoly and perfect competition. in addition to addressing small sample bias, the lerner index can assess market power at a bank-year level (Jeon etal., 2011). this makes it ideal for this study, which uses structural panel data and a small sample size of 25 Vietnamese joint stock commercial banks. the methodology also effectively assesses market power of banks of different ownership structures and sizes, taking market concentration and demand elasticity into account. the conventional lerner index (cMP) calculation by Berger et al. (2009) is used in the study. Price power, the percentage difference between the output price and the marginal cost (Mc), is being measured. Market power is measured from 0 (perfect competition) to 1 (pure monopoly). this index suggests that market power increases with index value. the lerner index below zero indicates that the output price is lower than the Mc, which may be due to suboptimal bank behavior (Fu et al., 2014). it can be expressed algebraically as: Conventional Lerner index it CMP P MC P it it it () = − (1) where Pit is bank i’s average production price, calculated by dividing total income (including interest and non-interest income) by total assets at time t. Using statistical data to estimate loan and deposit prices is limited. thus, a single indicator since bank total assets are widely used to measure output (Berg & kim, 1994; shaffer, 1993). Due to financial product and service heterogeneity, the output price includes interest and non-interest income. Bank i’s Mc of total assets at time t is Mcit. however, it cannot compute directly cOgent BUsiness & ManageMent 7 due to lack of information and no perfect method to determine inputs that reflect all bank activities and financial intermediary roles. a popular intermediary approach that calculates Mc from the following translogarithmic cost function is effective (Berger et al., 2009; sealey & lindley, 1977; turk ariss, 2010): LnTC it =++ () + + = = ∑ ∑ αα α β γ 01 2 2 1 3 1 3 1 2 1 2 lnQ lnQ W lnQ it it kk k it kk ln , ii t k i t kj kj j it lnW lnW Trend Trend T ,, ++ + () + = = ∑∑ 1 2 1 2 1 3 1 3 1 2 2 3 δϕ ϕϕ rrendlnQ Trend W it k k k it i ++ = ∑1 3 µε ln , (2) in this context, tc represents the aggregate cost incurred by the bank. Q serves as a measure of the bank’s output, specifically its total assets. W refers to the prices of three inputs: labor (W1), funds (W2) and fixed capital (W3). lastly, ε represents the error term in the model. according to koetter et al. (2012), the bank’s production function involves the utilization of labor and physical capital as inputs to acquire deposits, which are subsequently utilized to finance loans and other income-generating assets. the calculations provided are as follows. the total cost is determined by the aggregate of interest expenses, personnel expenses and other operating and administrative expenses. the variables W1, W2 and W3 represent the ratios of personnel expenses (or staff costs) to total assets, interest and similar expenses to deposits from customers and other operating and administrative expenses (excluding staff costs, which are already accounted for in W1) to fixed assets, respectively. the inclusion of a time trend in the analysis accounts for the impact of technological advancements, resulting in shifts in the cost function over a period of time. in the event of a technical modification, holding all other factors constant, the average cost is expected to decrease. to estimate the cost function, the utilization of fixed effects is utilized to capture the impact of potential unobserved variables that are specific to each bank (Maudos & nagore, 2005). the estimation is typically conducted with the imposition of symmetry restrictions, specifically the condition that αit = αti. the literature acknowledges that the estimated Mc comprises the cumulative value of both marginal financial and operating costs, while disregarding the expenses associated with risk (Berger et al., 2009; Fu et al., 2014; Maudos & nagore, 2005). the Mc of the bank is determined by taking the first derivative of the total cost function derived from equation (2) mentioned earlier. MC TAit = ∂ ∂= ×+ + + = ∑ TC Q TC QlnQ lnW Tr it it it it it k k k it [, αα γ ϕ 12 1 3 3 1 2ee n d ] (3) however, the conventional lerner index assumes that banks are capable of attaining complete efficiency, meaning they do not employ excessive scarce resources or allocate resources in inadequate proportions (technical and allocative efficiency). if banks do not meet these efficiency criteria, the calculation using the conventional approach may be biased, as banks could take advantage of pricing opportunities that arise from their market power. hence, the author proceeds to estimate equation (2) employing a stochastic cost frontier methodology that incorporates the potential cost inefficiencies of banks, commonly referred to as the efficiency-adjusted lerner index (aMP). this approach utilizes maximum likelihood estimation and is widely regarded as more effective in assessing the impact of competition on efficiency. the cost (in)efficiency of a bank can be measured by assessing the disparity between the minimum cost and the actual cost output. in order to employ stochastic frontier analysis (sFa), it is necessary to possess knowledge of the parametric form of the error distribution. this study aligns with the existing literature and incorporates certain assumptions. specifically, the error term ( vi ) is considered a two-sided error that accounts for statistical noise. it is assumed to follow a standard normal distribution with zero mean and a certain variance. On the other hand, the random variable uit represents cost inefficiency and is strictly non-negative. it is assumed to follow a half-normal distribution, which means that its normal distribution is truncated at zero from below. the variance of uit is also taken into account. in relation to the variable of interest, alternative distributional assumptions such as exponential, truncated normal and gamma distributions have been proposed in previous studies (Bayeh et al., 2021; koetter et al., 2012; Williams, 2012). the primary distinction between the two methodologies primarily lies in 14 D. t. ngUYen etal. References adesina, k. s. (2019). Bank technical, allocative and cost efficiencies in africa: the influence of intellectual capital. The North American Journal of Economics and Finance, 48, 1–16. https://doi.org/10.1016/j.najef.2019.03.009 akins, B., li, l., ng, J., & Rusticus, t. O. (2016). Bank competition and financial stability: evidence from the financial crisis. Journal of Financial and Quantitative Analysis, 51(1), 1–28. https://doi.org/10.1017/s0022109016000090 amidu, M., & Wolfe, s. (2013). Does bank competition and diversification lead to greater stability? evidence from emerging markets. Review of Development Finance, 3(3), 152–166. https://hdl.handle.net/10520/eJc143079 https:// doi.org/10.1016/j.rdf.2013.08.002 anginer, D., Demirguc-kunt, a., & Zhu, M. (2014). how does competition affect bank systemic risk? Journal of Financial Intermediation, 23(1), 1–26. https://doi.org/10.1016/j.jfi.2013.11.001 arellano, M., & Bond, s. (1991). some tests of specification for panel data: Monte carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297. https://doi.org/10.2307/2297968 arellano, M., & Bover, O. (1995). another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D azmi, W., anwer, Z., ali, M., & Mohamad, s. (2024). competition, stability, and institutional environment: the case of dual banking economies. International Journal of Finance & Economics, 29(1), 609–631. https://doi.org/10.1002/ ijfe.2700 Bakhouche, a. (2024). competition, stability and the efficiency channel in the tunisian banking system. International Journal of Accounting, Auditing and Performance Evaluation, 20(1/2), 121–154. https://doi.org/10.1504/ iJaaPe.2024.135553 Bayeh, a., Bitar, M., Burlacu, R., & Walker, t. (2021). competition, securitization, and efficiency in Us banks. The Quarterly Review of Economics and Finance, 80, 553–576. https://doi.org/10.1016/j.qref.2021.04.004 Beck, t., De Jonghe, O., & schepens, g. (2013). Bank competition and stability: cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218–244. https://doi.org/10.1016/j.jfi.2012.07.001 Beck, t., Demirgüç-kunt, a., & levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581–1603. https://doi.org/10.1016/j.jbankfin.2005.05.010 Berg, s. a., & kim, M. (1994). Oligopolistic interdependence and the s of production in banking: an empirical evaluation. Journal of Money, Credit and Banking, 26(2), 309–322. https://doi.org/10.2307/2077911 Berger, a. n., & Bouwman, c. h. (2009). Bank liquidity creation. Review of Financial Studies, 22(9), 3779–3837. https:// doi.org/10.1093/rfs/hhn104 Berger, a. n., klapper, l. F., & turk-ariss, R. (2009). Bank competition and Financial stability. Journal of Financial Services Research, 35(2), 99–118. https://doi.org/10.1007/s10693-008-0050-7 Blair, R. D., & sokol, D. D. (2015). The Oxford handbook of international antitrust economics (Vol. 2). Oxford University Press. Boyd, J. h., & De nicoló, g. (2005). the theory of bank risk taking and competition revisited. The Journal of Finance, 60(3), 1329–1343. https://doi.org/10.1111/j.1540-6261.2005.00763.x claessens, s., & laeven, l. (2004). What drives bank competition? some international evidence. Journal of Money, Credit and Banking, 36(3), 563–583. http://www.jstor.org/stable/3838954 coccorese, P. (2009). Market power in local banking monopolies. Journal of Banking & Finance, 33(7), 1196–1210. https://doi.org/10.1016/j.jbankfin.2008.12.013 coelli, t. J., Rao, D. s. P., O’Donnell, c. J., & Battese, g. e. (2005). An introduction to efficiency and productivity analysis. springer science & Business Media. Danisman, g. (2018). Overview of competition in the banking sector. International Journal of Economics, Commerce and Management, 6(4), 59–71. https://ijecm.co.uk/wp-content/uploads/2018/04/645.pdf#:~:text=URl%3a%20 https%3a%2F%2Fijecm.co.uk%2Fwp Danisman, g. O., & Demirel, P. (2019). Bank risk-taking in developed countries: the influence of market power and bank regulations. Journal of International Financial Markets, Institutions and Money, 59, 202–217. https://doi. org/10.1016/j.intfin.2018.12.007 Delis, M. D. (2012). Bank competition, financial reform, and institutions: the importance of being developed. Journal of Development Economics, 97(2), 450–465. https://doi.org/10.1016/j.jdeveco.2011.05.012 eyceyurt Batir, t., Volkman, D. a., & gungor, B. (2017). Determinants of bank efficiency in turkey: Participation banks versus conventional banks. Borsa Istanbul Review, 17(2), 86–96. https://doi.org/10.1016/j.bir.2017.02.003 Fan, Y., Jiang, Y., Zhang, X., & Zhou, Y. (2019). Women on boards and bank earnings management: From zero to hero. Journal of Banking & Finance, 107, 105607. https://doi.org/10.1016/j.jbankfin.2019.105607 Fang, J., lau, c.-k. M., lu, Z., tan, Y., & Zhang, h. (2019). Bank performance in china: a Perspective from Bank efficiency, risk-taking and market competition. Pacific-Basin Finance Journal, 56, 290–309. https://doi.org/10.1016/j. pacfin.2019.06.011 Fu, X., lin, Y., & Molyneux, P. (2014). Bank competition and financial stability in asia Pacific. Journal of Banking & Finance, 38, 64–77. https://doi.org/10.1016/j.jbankfin.2013.09.012 Fu, X. M., lin, Y. R., & Molyneux, P. (2015). Bank capital and liquidity creation in asia Pacific. Economic Inquiry, 54(2), 966–993. https://doi.org/10.1111/ecin.12308 cOgent BUsiness & ManageMent 15 Fungáčová, Z., & Weill, l. (2013). Does competition influence bank failures? evidence from Russia. Economics of Transition, 21(2), 301–322. https://doi.org/10.1111/ecot.12013 ghenimi, a., chaibi, h., & Omri, M. a. B. (2017). the effects of liquidity risk and credit risk on bank stability: evidence from the Mena region. Borsa Istanbul Review, 17(4), 238–248. https://doi.org/10.1016/j.bir.2017.05.002 guo, J., & chai, J. (2024). Banking competition and systemic risk: evidence from china. Journal of Risk, 26(3), 75–111. https://ssrn.com/abstract=4727800 halim, M. a., Moudud-Ul-huq, s., sobhani, F. a., karim, Z., & nesa, Z. (2023). the nexus of Banks’ competition, ownership structure, and economic growth on credit risk and financial stability. Economies, 11(8), 203. https://doi. org/10.3390/economies11080203 hussain, M., & Bashir, U. (2020). Risk-competition nexus: evidence from chinese banking industry. Asia Pacific Management Review, 25(1), 23–37. https://doi.org/10.1016/j.apmrv.2019.06.001 Jeon, B. n., Olivero, M. P., & Wu, J. (2011). Do foreign banks increase competition? evidence from emerging asian and latin american banking markets. Journal of Banking & Finance, 35(4), 856–875. https://doi.org/10.1016/j.jbankfin.2010.10.012 Jeon, J. Q., & lim, k. k. (2013). Bank competition and financial stability: a comparison of commercial banks and mutual savings banks in korea. Pacific-Basin Finance Journal, 25, 253–272. https://doi.org/10.1016/j.pacfin.2013.10.003 Jondrow, J., lovell, c. k., Materov, i. s., & schmidt, P. (1982). On the estimation of technical inefficiency in the stochastic frontier production function model. Journal of Econometrics, 19(2–3), 233–238. https://doi. org/10.1016/0304-4076(82)90004-5 karavitis, P., kokas, s., & tsoukas, s. (2021). gender board diversity and the cost of bank loans. Journal of Corporate Finance, 71, 101804. https://doi.org/10.1016/j.jcorpfin.2020.101804 kasman, s., & kasman, a. (2015). Bank competition, concentration and financial stability in the turkish banking industry. Economic Systems, 39(3), 502–517. https://doi.org/10.1016/j.ecosys.2014.12.003 keeley, M. c. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5),1183– 1200. http://www.jstor.org/stable/2006769 kinateder, h., choudhury, t., Zaman, R., scagnelli, s. D., & sohel, n. (2021). Does boardroom gender diversity decrease credit risk in the financial sector? Worldwide evidence. Journal of International Financial Markets, Institutions and Money, 73, 101347. https://doi.org/10.1016/j.intfin.2021.101347 koetter, M., kolari, J. W., & spierdijk, l. (2012). enjoying the quiet life under deregulation? evidence from adjusted lerner indices for Us banks. Review of Economics and Statistics, 94(2), 462–480. https://doi.org/10.1162/Rest_a_00155 kumbhakar, s. c., & lovell, c. k. (2003). Stochastic frontier analysis. cambridge university press. https://doi.org/10.1017/ cbo9781139174411 kwan, s., & eisenbeis, R. a. (1997). Bank risk, capitalization, and operating efficiency. Journal of Financial Services Research, 12(2–3), 117–131. https://doi.org/10.1023/a:1007970618648 le, t. (2020). the interrelationship among bank profitability, bank stability, and loan growth: evidence from Vietnam. Cogent Business & Management, 7(1), 1840488. https://doi.org/10.1080/23311975.2020.1840488 le, t. (2021). can foreign ownership reduce bank risk? evidence from Vietnam. Review of Economic Analysis, 13(4), 479–500. https://doi.org/10.15353/rea.v13i3.1726 le, t. D. (2019). the interrelationship between liquidity creation and bank capital in Vietnamese banking. Managerial Finance, 45(2), 331–347. https://doi.org/10.1108/MF-09-2017-0337 le, t. D., ho, t. h., ngo, t., nguyen, D. t., & tran, s. h. (2022). a dataset for the Vietnamese banking system (2002– 2021). Data, 7(9), 120. https://doi.org/10.3390/data7090120 le, t. D., nguyen, V. t., & tran, s. h. (2020). geographic loan diversification and bank risk: a cross-country analysis. Cogent Economics & Finance, 8(1), 1809120. https://doi.org/10.1080/23322039.2020.1809120 li, s. (2019). Banking sector reform, competition, and bank stability: an empirical analysis of transition countries. Emerging Markets Finance and Trade, 55(13), 3069–3093. https://doi.org/10.1080/1540496X.2018.1540349 li, Y., & Peng, W. (2024). Bank price competition and enterprise innovation——Based on empirical evidence of chinese a-share listed companies. International Review of Financial Analysis, 91, 103004. https://doi.org/10.1016/j. irfa.2023.103004 Maji, s. g., & hazarika, P. (2018). capital regulation, competition and risk-taking behavior of indian banks in a simultaneous approach. Managerial Finance, 44(4), 459–477. https://doi.org/10.1108/MF-09-2017-0340 Maudos, J., & nagore, a. (2005). Explaining market power differences in banking: a cross-country study. instituto Valenciano de investigaciones económicas. Meles, a., Porzio, c., sampagnaro, g., & Verdoliva, V. (2016). the impact of the intellectual capital efficiency on commercial banks performance: evidence from the Us. Journal of Multinational Financial Management, 36, 64–74. https://doi.org/10.1016/j.mulfin.2016.04.003 Mirzaei, a., Moore, t., & liu, g. (2013). Does market structure matter on banks’ profitability and stability? emerging vs. advanced economies. Journal of Banking & Finance, 37(8), 2920–2937. https://doi.org/10.1016/j.jbankfin.2013.04.031 nguyen, t. P. t., Roca, e., & sharma, P. (2014). how efficient is the banking system of asia’s next economic dragon? evidence from rolling Dea windows. Applied Economics, 46(22), 2665–2684. https://doi.org/10.1080/00036846.2014 .909578 16 D. t. ngUYen etal. noman, a. h. M., gee, c. s., & isa, c. R. (2018). Does bank regulation matter on the relationship between competition and financial stability? evidence from southeast asian countries. Pacific-Basin Finance Journal, 48, 144–161. https:// doi.org/10.1016/j.pacfin.2018.02.001 northcott, c. a. (2004). competition in banking: a review of the literature. Staff working papers (04–24). Bank of canada. Özşuca, e. a., & akbostancı, e. (2016). an empirical analysis of the risk-taking channel of monetary policy in turkey. Emerging Markets Finance and Trade, 52(3), 589–609. https://doi.org/10.1080/1540496X.2015.1047300 Perry, P. (1992). Do banks gain or lose from inflation? Journal of Retail Banking, 14(2), 25–31. Petersen, M. a., & Rajan, R. g. (1995). the effect of credit market competition on lending relationships. *The Quarterly Journal of Economics, 110(2), 407–443. https://doi.org/10.2307/2118445 Prakash, n., singh, s., & sharma, s. (2022). contemporaneous or causal? evaluating the triumvirate of insolvency risk, capitalization and efficiency in indian commercial banking. Managerial Finance, 48(1), 136–157. https://doi. org/10.1108/MF-02-2021-0070 Rakshit, B., & Bardhan, s. (2019). Bank competition and its Determinants: evidence from indian Banking. International Journal of the Economics of Business, 26(2), 283–313. https://doi.org/10.1080/13571516.2019.1592995 saif-alyousfi, a. Y. h., saha, a., & Md-Rus, R. (2020). the impact of bank competition and concentration on bank risk-taking behavior and stability: evidence from gcc countries. The North American Journal of Economics and Finance, 51, 100867. https://doi.org/10.1016/j.najef.2018.10.015 schaeck, k., & cihak, M. (2008). how does competition affect efficiency and soundness in banking? new empirical evidence. SSRN Electronic Journal, https://doi.org/10.2139/ssrn.1240856 sealey, c. W., Jr., & lindley, J. t. (1977). inputs, outputs, and a theory of production and cost at depository financial institutions. The Journal of Finance, 32(4), 1251–1266. https://doi.org/10.1111/j.15406261.1977.tb03324.x shaban, M., & James, g. a. (2018). the effects of ownership change on bank performance and risk exposure: evidence from indonesia. Journal of Banking & Finance, 88, 483–497. https://doi.org/10.1016/j.jbankfin.2017.02.002 shaffer, s. (1993). a test of competition in canadian banking. Journal of Money, Credit and Banking, 25(1), 49–61. https://doi.org/10.2307/2077819 singla, M., & singh, s. (2019). Board monitoring, product market competition and firm performance. International Journal of Organizational Analysis, 27(4), 1036–1052. https://doi.org/10.1108/iJOa-07-2018-1482 sinha, P., & sharma, s. (2016). Relationship of financial stability and risk with market structure and competition: Evidence from Indian banking sector. soedarmono, W., Machrouh, F., & tarazi, a. (2011). Bank market power, economic growth and financial stability: evidence from asian banks. Journal of Asian Economics, 22(6), 460–470. https://doi.org/10.1016/j.asieco.2011.08.003 soedarmono, W., Machrouh, F., & tarazi, a. (2013). Bank competition, crisis and risk taking: evidence from emerging markets in asia. Journal of International Financial Markets, Institutions and Money, 23, 196–221. https://doi. org/10.1016/j.intfin.2012.09.009 srivastava, B., singh, s., & Jain, s. (2023). Bank competition, risk-taking and financial stability: insights from an emerging economy. Competitiveness Review: An International Business Journal, 33(5), 959–992. https://doi.org/10.1108/ cR-10-2021-0143 sufian, F., & akbar noor Mohamad noor, M. (2009). the determinants of islamic banks’ efficiency changes. International Journal of Islamic and Middle Eastern Finance and Management, 2(2), 120–138. https://doi. org/10.1108/17538390910965149 tabak, B. M., Fazio, D. M., & cajueiro, D. O. (2012). the relationship between banking market competition and risk-taking: Do size and capitalization matter? Journal of Banking & Finance, 36(12), 3366–3381. https://doi. org/10.1016/j.jbankfin.2012.07.022 tan, Y. (2016). the impacts of risk and competition on bank profitability in china. Journal of International Financial Markets, Institutions and Money, 40, 85–110. https://doi.org/10.1016/j.intfin.2015.09.003 thanh, l. P., gholipour, h. F., & arjomandi, a. (2024). navigating banking transitions: insights into competition and stability from Vietnam’s experience. Post-Communist Economies, 1–18. https://doi.org/10.1080/14631377.2024.23293 92 turk ariss, R. (2010). On the implications of market power in banking: evidence from developing countries. Journal of Banking & Finance, 34(4), 765–775. https://doi.org/10.1016/j.jbankfin.2009.09.004 Williams, J. (2012). efficiency and market power in latin american banking. Journal of Financial Stability, 8(4), 263– 276. https://doi.org/10.1016/j.jfs.2012.05.001