Empirical evidence on bank market power, business models, stability and performance in the emerging economies

This paper studies the nexus between banks’ market power and business model represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business model on banking stability and performance. We use a sample made up with 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 to generate non-traditional income as alternative soruce of revenues. Our findings also show that the implementation of Basel 2 Accord encourages banks to create non-interest income from trading & derivatives activities. We also document that banks with higher market power tend to increase non-deposit short-term funding in their banking scheme. In the evaluation of the banking stability, our results suggest that banks with greater non-traditional income are associated with less banking overall risk. Moreover, non-traditional incomes also contribute to better bank performance.