Bank Concentration, Financial Development and Income Volatility: Evidence From The OIC Countries

TitleBank Concentration, Financial Development and Income Volatility: Evidence From The OIC Countries
Publication TypeConference Paper
Year of Publication2020
Date Published27-28 August
Conference NameThe 14th Bulletin of Monetary Economics and Banking (BMEB)
Publication LanguageEnglish
AuthorsSmolo, E, Ibrahim, MH, Dewandaru, G
PublisherBank Indonesia
Place PublishedJakarta
Abstract

The study investigates the impact of bank concentration and financial development on economic volatility using OIC member countries as its sample. We utilize the generalized method of moments (GMM) estimator as it fits the best our sample. Our estimation results indicate that the effect of bank concentration on economic volatility is linear and depends on measurement used as a proxy for bank concentration. In addition, the impact of financial development on economic volatility is mainly negative with limited significance. However, the results show that this relationship depends on the level of financial development of a country. These are valuable inputs for policy makers and regulators within OIC countries as the overall economic stability can be improved significantly by reducing bank concentration. This can be achieved by actively monitoring the banking sector and taking necessary steps to prevent concentration of bank power within few banks as well as by increasing overall number of financial players (banks) in the market. However, as pointed out by other studies, different bank concentration measures lead to different results and hence conclusions. Thus, using a single measure could be very misleading and we need to be very careful when interpreting results and offering policy recommendations.

Refereed DesignationRefereed