Impact of bank competition on bank stability in China

Abstract

This study investigates the impact of bank competition on bank stability of China over the 2006–2019 period. We use unbalanced panel data from 38 Chinese commercial banks. We employ the natural logarithm of the Z-score to measure bank stability, and the NPL ratio to measure bank credit risk. Meanwhile, the competition was measured through Panzar-Rosse H-statistic. The study uses both the linear and non-linear regression models and investigates effect of the interest rate liberalization in China. The results show that the degree of bank competition in China is on a rise trend. More competition has caused a decrease in stability measured by the Z-score. This result supports the “competition-fragility” theory. The results of the nonlinear model shows that there is a “U-shaped” relationship between competition and stability. In addition, the completion of interest rate liberalization expands the negative impact of bank competition on bank stability in China. However, more competition also has a negative impact on credit risk (NPL), supporting the “competition-stability.”