THE EFFECT OF BANK COMPETITIVENESS ON BANKING STABILITY IN INDONESIA

Abstract

The research examines how competition between banks affects banking stability in Indonesia through analysis of 88 commercial banks from 2010 to 2024. The System Generalized Method of Moments (System-GMM) analyzes banking stability through Z-score measurements while using the Herfindahl–Hirschman Index (HHI) to assess market competition and controlling for bank size and profitability and capitalization and liquidity and GDP growth and policy rate. The research shows that banking stability improves when competition increases while market concentration leads to increased financial instability. The research shows that bank-specific factors including profitability and capitalization and liquidity levels enhance stability but policy rate increases decrease stability. The research demonstrates that banks need both competitive freedom and proper regulatory oversight to build strong systemic defenses. The research shows that policymakers should support innovation and financial inclusion through effective supervision and macroprudential coordination to protect Indonesia's dual banking system.