Testing the Relationship between Competition and Soundness in Banking Sector: Panel ARDL Model in Emerging Countries

Competition is generally considered as a positive driving force in many sectors as it enhances efficiency and promotes innovation. In the financial sector, countries are implementing reforms that increase competition. This study aims to examine the relationship between competition and financial soundness employing Panel ARDL pooled mean group (PMG) estimations in 16 emerging countries' banking sectors for 1996-2015 periods. Results show that competition and financial soundness are moving together in the short and long-run. Also, it is found that competition has a negative effect on financial soundness in the short and long-run. Findings tend to support "competition-fragility" approach in emerging country banking sectors.