Abstract:
This study empirically examines the relationship between the banking competition and financial
sector stability in Pakistan. This study considers 31 banks during the period lasting from 2001 to
2014. The sample period shows that market power of banks is relatively inelastic. In this study,
the stability of bank is divided into solvency, liquidity and credibility. The results present that
increase in competition is negatively related to stability in solvency and credibility whereas it is
positively associated with liquidity of financial institutions. These findings corroborate the
competition fragility approach. Another important finding of this study is that the market power
of state-owned banks is higher than private and foreign banks. The solvency and liquidity
positions of private banks are higher than state-owned and foreign banks. In addition, this study
explores that the credit risk of state-owned bank is relatively higher due to higher NPLs than
private and foreign banks.
