International Economics

<< N°159

Issue Q3 2019  
Bank consolidation and financial stability in Indonesia  
Inka Yusgiantoro
Wahyoe Soedarmono
Amine Tarazi
This paper extends prior literature on the impact of bank market power as a proxy of bank consolidation on financial stability using a single country setting. From a sample of Indonesian commercial banks over the 2010–2015 time span, our empirical results show that higher bank market power is associated with lower insolvency risk and higher capital ratios, suggesting that bank consolidation is beneficial for financial system stability in general. A deeper analysis however reveals that higher market power is detrimental for financial stability in state-owned banks and small private-owned banks. This paper therefore suggests that strengthening market power in large private-owned banks, but encouraging competition in state-owned banks and small private-owned banks to reduce market power, could enhance financial stability. Abstract

Consolidation ; Market power ; Financial stability ; Indonesian banking ; Keywords
G21 ; G28 ; JEL classification
Order form