Author: paloma

04 jul Apart from bank-level factors, we also allow for the macroeconomic variables in explaining bank returns

The Lerner index ranges from 0 to 1, in which higher values indicate larger market power. The Lerner index displays the extent to which a bank gains the market power to set its price above the marginal cost.

Considering the two opposing theories of “competition-fragility” and “competition-stability”, we realize that ong banks. However, in the Vietnamese banking market, a bank with larger market power tends to gain the advantages in competitive capacity, business resources, expertise, and experience. Hence, assuming that these advantages might support banks with greater market power in loan portfolio diversification, we expect that the adverse impact of loan portfolio diversification on bank returns should be more pronounced at banks with less market power.

3.2.4. Control variables

In the model specification of bank returns, we control for bank capital (the ratio of bank equity to total assets), because more capitalized banks may grant loans cautiously and borrow less, thus decreasing their costs and increasing their profits (Tan, 2016 ).