Competitive Conditions and Banking Stability in Pakistan: New Evidence from Market Power and Charter Value

Abstract

In this study, we invoke the theoretical notion of different competitive conditions in lending and deposit market power for the banking industry of Pakistan. We find highly monopolistic conditions in lending market whereby majority of the banks are enjoying high market power. On the other hand, the deposit market is found to be highly competitive. Subsequently, we find the effects of the lending and deposit market measures of market power on the riskiness of banks to be asymmetric. In addition, we introduce charter value as a determinant of banks’ risk for the first time in the case of Pakistan and tested for whether or not greater higher valuable charters enhance the risk aversive tendencies of banks to preserve charter value? Our findings suggest that the theoretical link between charter value and market power is sufficiently strong to restrain risky behavior of banks.