This paper examines the presence of two competing views—“competition-fragility” and “competition-stability”—and the role of efficiency in analyzing the impact of competition on bank stability. The approach is to first construct measures of bank competition and bank efficiency from a unique dataset of balance sheet and income statements for 542 banks operating in the Philippines from March 2010 to December 2020. The paper then estimates the impact of these competition measures and bank efficiency on solvency risk across universal/commercial banks (U/KBs), thrift banks (TBs) and rural/cooperative banks (R/CBs) industries. Separately, I also estimate the impact of bank efficiency on measures of bank competition.
At the industry level, the results reveal that bank competition reduces bank-level solvency risk. This implies that bank competition enhances bank stability. Looking at the risk distribution, the study shows the presence of the competition-fragility and competition-stability hypotheses holding simultaneously for U/KBs. These findings imply that the impact of competition on bank risk depends crucially on the underlying individual bank risk. These findings also mean that competitive opportunities remain for smaller U/KBs. The study also observes that higher bank-level cost-to-income ratio does not contribute to bank stability although it strengthens in the presence of competition. Finally, the paper finds that the pandemic has increased bank risk across banking industries.