Financial Stability Versus Bank Lending Channel Transmission: The Impact of Bank Competition and Concentration in Indonesia

Using financial data from 47 publicly listed banks in Indonesia from 2013Q4 to 2023Q3, this study employs a new approach by utilizing ΔCoVaR as a proxy for financial stability to examine how changes in bank competition in bank competition and banking industry concentration affects financial stability and the effectiveness of bank lending channel transmission. We find that, on one hand, an increase in market power (decreased bank competition) and an increase in banking industry concentration reduce financial stability. On the other hand, an increase in banking industry concentration enhances the effectiveness of the bank lending channel transmission by increasing the cost of funds, when the central bank interest rate rises. Our findings suggest the need for closer oversight of increasing market power and banking industry concentration, particularly in small (KBMI 1&2) banks and non-state-owned banks, as these factors have been found to decrease financial stability.