Abstract
This paper studies the nexus between market power and business models in the banking industry. Business models are represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business models on banking stability and performance. Using a sample comprising six ASEAN country banking sectors from 2002 to 2015, we find that banks with a strong capital base but lower net interest margin perform better in translating their market power into generating non-traditional income as alternative sources of revenues. Our findings also show that the implementation of the Basel 2 Accord encourages banks to create non-interest income from trading and derivatives activities as well as from other non-interest income. We also document that banks with higher market power tend to increase non-deposit short-term funding in their financing mix. In the evaluation of banking stability, our results suggest that banks with greater non-traditional income are associated with less overall banking risk. Moreover, non-traditional incomes also contribute to better bank performance.
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Notes
We include Islamic banks in the category of commercial banks due to the same business activities, although it should be noted that Islamic banks do not charge interest.
We agree with the suggestion from one of the reviewer to add foreign exchange (ER) variable as an additional variable on top of the existing country control variables considering that (i) banks’ short short-term borrowing consist not only from local currency, and (ii) the ASEAN financial crisis in late 1990 was stimulated by the devaluation of local currencies in Thailand and Indonesia and the spillover to its neighbors. We include this variable in the examination of the relationship between bank business models and banking stability and performance.
The term “deposit” in this study refer to traditional funding (current, saving, and time deposit accounts), while deposits from banks have a different characteristics compared to banks’ traditional funding. These type of deposits are made by other banks through the interbank market system.
The regression results of the Eurozone banking sectors with respect to the link between market power and bank business models is provided in “Appendix”.
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Acknowledgements
This research has benefited from the financial support of the LPDP (Indonesia Endowment Fund for Education) and of Deloitte (Belgium and Luxembourg). The Authors would like to thank Cédric Heuchenne, Caroline Pommeranz, Bertram Steininger, and Didier Van Caillie, as well as the participants of the 2017 Luxembourg Doctoral Finance Workshop. We would like to thank the organizers of the EBES 25th Conference (Berlin 2018) for awarding us the best paper award. We also would like to thank Ahmed Faruk Aysan and all the participants of the EBES 25th Conference in Berlin. Finally, we thank to two EABR reviewers for their valuable feedback.
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Sudrajad, O.Y., Hübner, G. Empirical evidence on bank market power, business models, stability and performance in the emerging economies. Eurasian Bus Rev 9, 213–245 (2019). https://doi.org/10.1007/s40821-018-0112-1
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DOI: https://doi.org/10.1007/s40821-018-0112-1